The Best Way To Profit From QE3
Following August’s lackluster jobs report, the Fed has decided to take additional steps to boost economic growth and curtail unemployment.
In case you missed it, Fed Chairman Ben Bernanke made a critical announcement late last week. He said the central bank is officially launching a third round of quantitative easing (QE3).
Under the plan, the Fed will buy an additional $40 billion worth of agency mortgage-backed securities every month. The new purchases will increase the Fed’s holdings of long-term securities by about $85 billion per month.
But unlike the previous two rounds of quantitative easing, there is no time limit.
In other words, QE3 will continue for as long as it takes to bring the unemployment rate down to more acceptable levels. The Fed hopes the lack of an expiration date will inspire businesses to expand and hire more workers.
What’s more, the Fed said it will keep short-term interest rates near zero at-least through 2015.
The news sent the US Dollar tumbling against major currencies. And as you might expect, dollar-denominated assets like stocks and precious metals soared.
US stocks jumped by 2% to levels last seen in late 2007. Gold rose above the $1,700 per ounce to a six-and-a-half month high. And silver increased 2.5% to its highest levels in six-months.
Clearly, a new bullish trend in stocks and precious metals is emerging…
So, what’s the best way to play QE3?
One way is to invest in exchange traded funds which track the prices of gold and silver. The SPDR Gold Trust (GLD) and the iShares Silver Trust (SLV) are two of the most popular vehicles for profiting on moves in these precious metals.
If gold and silver prices continue moving higher, these two ETFs will no doubt produce significant profits for investors.
However, another way to profit from a rally in stocks and precious metals is to buy shares of a high-quality mining stock. And it just so happens, the largest gold miner in the world is a terrific bargain right now.
Barrick Gold (ABX) is the industry leader in production, reserves, and market cap. The company operates globally with a portfolio of 27 operating mines and advanced exploration and development projects located all over the globe.
At the end of last year, Barrick had proven and probable reserves of 139.9 million ounces of gold, 1.07 billion ounces of silver, and 12.7 billion pounds of copper.
For 2012, the company expects to produce 7.3 to 7.8 million ounces of gold and 460 to 500 million pounds of copper. Net cash costs of production are anticipated to be of $550-$575 per ounce and $2.10-$2.30 per pound respectively.
With gold currently trading around $1,770 per ounce and copper at $3.76 per pound, ABX clearly stands to generate a hefty profit this year.
Nevertheless, the stock is undervalued by the market.
At a recent price of $42 per share, ABX is trading at just 10x 2012 projected earnings of $4.22 per share. That’s well below the projected long-term earnings growth rate of 81% annually over the next five years.
What’s more, the gold miner sports an extremely low PEG ratio of 0.12. A PEG of 1.00 is considered fair value for a stock. So based on this simple valuation measure, ABX is about 88% undervalued relative to its long-term projected growth rate.
And while the stock has surged over 28% since late July, it’s still about 24% below its 52-week high of $55.20 per share.
No question about it, ABX is one of the market’s few hidden gems at the moment.
Oh, and did I mention the stock pays a nice dividend. With an annual dividend of $0.80 per share, ABX currently yields 1.90%.
Not too shabby!
Take a closer look at Barrick Gold. With QE3 set to drive stock and precious metal prices higher, it’s the perfect time to add this high quality gold miner to your portfolio.
Profitably Yours,
Robert Morris
Category: Stocks
