Its value has fallen 98% in the last 113 years. Yet, despite that incredible decline it remains one of the most valuable and sought after assets in the world.
I'm talking about the U.S. dollar.
This is the reason gold is delivering its best return in five years and showing signs of a long-term reversal in 2016.
After hitting a new all-time high above $1,900 in 2011, gold fell into a nasty bear market.
From 2012 to the end of 2015, the price of gold fell almost 50%.
In 2016, gold is on the rebound. The price of gold is up 26%, more than a 300% premium to the S&P 500's 6% return.
That puts gold on pace for its best return in more than five years.
Gold's sudden reversal is being driven by the same trend that's driving the U.S. dollar.
After surging in 2014 and 2015, the U.S. dollar is back to its losing ways in 2016, falling 4% on the year. Take a look below at the U.S. dollar's big surge in 2014 and 2015 and decline in 2016.
The dollar isn't alone. Other global currencies across the world also display this troubling long-term trend of extreme devaluation.
These charts tell me something important. Expect plenty more currency devaluation ahead.
I expect that to trigger more capital inflows into gold.
One way to profit is with SPDR Gold Shares (NYSE: GLD), an exchange traded fund that is designed to track the price of gold.
Another way to profit is with VanEck Vectors Gold Miners ETF (NYSE: GDX), an ETF that invests in 52 gold and silver miners mostly traded on U.S. and Canadian stock exchanges.
My favorite way to capitalize on a long-term reversal in the price of gold, though, is by investing in gold miners.
These companies offer the most leverage against the rise and fall of gold prices.
I have chosen to highlight two companies because they are two of the largest gold miners in the world and have the lowest cost production in the market.
Barrick Gold (NYSE: ABX) is headquartered in Ontario and is the largest gold miner in the world. The recovery in the price of gold has given Barrick a huge boost. After being up more than 200% on the year in June, shares are still up nearly 150%. Looking forward, I am expecting more of the same from Barrick.
In light of the multi-year bear market in gold, Barrick was forced to cut expenses to the bone and streamline operations. For example, in 2015, Barrick recorded cost savings of more than $50 million. Barrick expects those savings to swell to $100 million in 2016. These adjustment have the company on pace to grow earnings 126% in 2016 and another 45% in 2017 as gold remains near a multi-year high.
Newmont Mining (NYSE: NEM) is also one of the largest gold miners in the world, headquartered in Colorado. Newmont has been a tear in 2016, up more than 120% on the year. Similar to Barrick, Newmont has been cutting expenses.
Newmont is interesting because it has one of the best project pipelines in the industry. For example, its Merian mine in Suriname is expected to begin production by the end of the year and contribute 400,000 to 500,000 ounces of gold annually in its first five years. These projects and new mines coming online has Newmont in position to cash in on higher gold prices with increased production.
Risks To Consider: The Fed has been bluffing about raising interest rates for most of the last five years. Although I believe it is unlikely the Fed will raise interest rates in the next year, if it does, it would strengthen the dollar and weigh on the price of gold and gold miner.
Action To Take: Currency devaluation is as predictable as the sun rising and setting. That's why gold is having its best performance in five years in 2016. Despite those gains, I believe gold is in the early stages of a long-term reversal. I expect that to drive capital inflows into gold ETF and particularly gold miners.
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