Getting the most out of the rally in gold requires looking beyond the precious metal to the miners, explorers and production companies, according to portfolio manager Robert Cohen.
“We still see gold as not being in a bubble,” said Mr. Cohen, who manages nearly $1 billion worth of gold portfolios with Goodman and Company Investment Counsel Ltd. “The price of gold has been adding about $100 an ounce per year, and next year, in light of the crisis in Greece, I see gold at $1,425 an ounce.” That's about 19% above the metal's current $1,200 range.
Mr. Cohen said the best way to benefit from the rising price of gold is through the companies that are mining and producing it at a relatively fixed cost.
“If you own a brick of gold and the price goes up by 10%, you've made 10%,” he said. “But for the production companies, a rising price translates to increased profit margins.”
The parlay can pay off handsomely for investors. Mr. Cohen estimates that, for every 1% increase in the price of gold, gold producers will see a corresponding increase of up to 3%.
“If you own the right stocks, there's a lot of alpha potential,” he said.
Of course, that extra return from the swelling profit margins cuts both ways. If the price of gold goes down, the profit margin gets smaller.
“By owning the miners instead of the physical gold you're taking on a little more risk,” Mr. Cohen said. “But you're also getting more reward.”
The Toronto-based money manager offers U.S. investors access to his strategy through the Dynamic Gold & Precious Metals Fund Ticker:(DWGOX).
The fund, which currently has just $3 million under management, typically holds around 40 stocks.
A couple of the largest holdings include Oshkosh Corp. Ticker:(OSK) and San Gold Corp. Ticker:(SGR).
Some of the attributes Mr. Cohen likes most about gold right now are many of the things most people don't like about the global economy.
“Over the past 10 years gold has been probably one of the best places to park your money,” he said. “The financial crisis was bad for gold, but what the governments are doing to try and get out of the crisis is good for gold.”
Mr. Cohen expects gold to continue to rally as more government spending is needed to ease the debt crisis threatening many European Union states.
“Gold is tied to the global money supply with a very high correlation,” he said. “Fiscal budget deficits and further printing of euros and dollars to fund obligations are all things from which gold benefits.”
Given the connection, Mr. Cohen doesn't see a whole lot of near-term risk for the precious metal. “The only downward pressure on gold would be a strong global economy where all the financial problems in Europe are solved,” he said. “And I don't see that right now.”
Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.