Good Time to Go to the Gold Mine

Many of these miners have had negative cash flows for several years. Agnico-Eagle (AEM - commentary - Cramer's Take) had a nice cash flow from operations of $229 million in 2007 but spent $510 million in capital expenditures in the form of buying equipment and digging for ore. This negative free cash flow is prevalent among many miners. Like oil explorers, miners are always looking for new resources, or else they risk going out of business.

Why buy this ETF right now? After the election, stocks will probably pop as the country becomes confident in its new leadership. Though many of the stocks in this ETF are international, there has been a high correlation between international markets and those in the U.S.

The macroeconomic tailwinds for the metal are superb. As countries print more money to bail out banks, the currency becomes diluted. There's a word for this: inflation. Guess what does well in an inflationary environment? Gold.

Gold does poorly when the U.S. dollar is strong. Ironically, with all of the subprime fallout, investors have rushed back into the dollar in a flight to safety, home of where all of these troubles began. This too has pushed down the price of gold.

Gold has been sold off with everything else. Investors have had to sell good investments to pay off margin calls. Mutual fund and hedge fund managers have had to liquidate as clients are looking for the door. As the price of gold recovers, the miners recover at even a more rapid pace as their profits escalate.

So what is going to move the price of these stocks? The perfect storm has brought these stocks down. Bad markets, all assets getting sold off, financials going out of business, a strange presidential election -- as these problems recede, miners are poised for a nice jump. Only a few of these scenarios have to lighten for this ETF to have a nice pop.

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At the time of publication, Osborne had no positions in the stocks mentioned.

Holmes R. Osborne III is a private money manager, founder of investment newsletter StockRoyalty.com and frequent author of financial columns. He has a degree in finance from the Martin J. Whitman School of Management at Syracuse University and is a CFA charter holder. Osborne is a member of the Pacific Council on International Relations, Malibu Rotary, Business Forum International and was formerly on the board of the L.A. National Association of Business Economists. He spoke this year at the fifth annual Value Investor Conference.