Gold and oil companies will probably be worth owning until the end of time. The advent of mass adoption of cars in China and India will put a constant squeeze on the oil supply since all of the easily obtainable oil is gone. Gold is loved in many foreign countries, and the U.S. has a lot of gold bugs, too. Whether you think gold is worth owning or not, the demand is great, and profits can be made by owning certain gold companies.
How high can gold go in its price per ounce? As of May 2012, gold was selling for around $1500 per ounce. Some speculators think that gold can go as high as $2000 to $5000 per ounce. Before you make a big bet, though, you need to think about what causes the price of gold to rise. First, there has to be more demand than supply. Secondly, a high inflation trend can cause gold price increases. Then, thirdly, if the U.S. is increasing the money supply by printing a lot of excess dollars, this can cause gold to rise along with the stock market in general.
A fourth cause of a rising price in gold needs special attention. Gold usually operates inversely to the price of U.S. dollars. So, a dollar downtrend will cause an increase in gold prices. If the dollar is going up in relation to other currencies, you probably ought to stay out of gold stocks until the dollar starts declining. It is very rare to see both the dollar and gold go up at the same time. It can happen if the European countries are collapsing. This exception is where economic turmoil makes it look like the FOMC will try to stimulate the economy to offset European problems and effectively debase the dollar.
A fifth cause for gold to rise occurs when the world is in a massive flight-to-safety mode. Whenever you see a rush in buying U.S. treasury bonds, it means people are factoring in a bad world situation where they think U.S. bonds are the safest place for their money. This stampede into bonds will cause rising gold prices because a lot of people and institutions trust gold more than bonds.
How do you know how much a company is worth? This question needs to be answered before you buy shares in the company. You need to know its approximate value over the long-term and what its probable peak stock price will be. The first thing to look at is the current value of the company's commodity. Gold was selling for $1200 per ounce at the end of August 2010.
The second parameter is finding out how much proven gold a company has. Suppose a gold company has 6 million ounces of gold. It may take $500 to get the gold out of the ground and processed. Then, tack on another $100 for other expenses for a safe measure. The company's net worth would be $1200-$600 expenses per ounce of gold and multiplied by 6 million. This comes out to 3.6 billion dollars. Now, divide that by the number of shares in the company. If they have 100 million shares, the price per share turns out to be $36. When the price gets near $36 per share, you should sell unless the company has found another 6 million ounces of gold.
Another point to think about is whether your company owns all the gold or not. If another gold miner owns 50% of your favorite company, that will cut the maximum stock price in half. Click on the ticker symbols below to see price charts of the companies. Click on the company name to view the company's website.
On another subject, suppose a company's resources are not easily known, or you are thinking about buying a tech company whose only real metric is sales and possible future demand. If the company is increasing revenue by 25% per year and you assume the earnings are growing the same amount, then you could put a price target on the company reflecting a PE of 25. If a $20 company currently has a PE of 25, you could expect the price to increase to $25 in a year's time. This would be a healthy return on your money for the year.
However, if the current PE of this company is only 10 with a $10 price, then the company is undervalued compared to growth, and the price of the company's stock could greatly increase. Using this same 25% growth company and figuring a target price to reflect the undervalue gives an entirely different picture of possible gain. You would take the $10 current price and multiply that by 2.5 to figure in a PE of 25, and that gives a new price target of $25.00. So, this $10 growing company that is undervalued could increase your monetary gain by 150%.GoDaddy Domains for $7.49
The table below shows the price of oil (WTI) compared to the price of ERX, the triple long oil ETF. The purpose of this table is to provide a good entry point for buying and profiting from owning ERX for a few days or a few weeks. The price of oil will never stay down for long. Therefore, if you know ERX and oil are near their six month lows, it will be a good time to make a monetary gain from the eventual rise of the oil price.
A couple of other things need to be noted. The price of oil is calculated in dollars. If the dollar is rising in value, the price per barrel of oil will decline because foreign countries won't need more dollars to cover the cost of oil. In other words, they won't be dealing with devalued dollars.
Secondly, you have to look at the overall cost of oil. If it takes $75 for oil companies to make a significant profit from oil, then the price of oil will most likely never go lower than that figure except for possibly a brief period. Therefore, you should buy oil stocks when the cost of oil is near the baseline price. Then, when demand becomes greater than the supply, the oil price will rise, and you can make a profit.
As you can see from the yellow highlights of the above table, ERX should be bought whenever it is $32 or lower. Then, if you can hang on until oil gets back to around $98 as highlighted in green, you will make around 33% profit for holding ERX if you sell it while oil is still high. This scenario may be possible twice each year for a 66% profit.