Forbes.com - Gold Investing for Cowards

Nothing wrong with being a coward if it makes you money in this market, which is why this article is worth your attention, it also mentions a stock we just covered today.

With the U.S. Federal Reserve pumping hundreds of billions of dollars into the financial system, inflation is almost certain to begin ticking upward eventually, bringing the price of gold up as well.

This is Mark Johnson's reasoning. Then again, Johnson, who is manager of the USAA Precious Metals and Minerals (USAGX) fund, knows he could be wrong. Yet even if he is, it won't matter much to his investors: Johnson, 58, has gone to pains to build his $830 million (assets) portfolio into one that is largely agnostic about swings in metals prices.

Since Johnson took over the fund 15 years ago, it has returned an annual average of 8.6% vs. 6.5% for the S&P 500. He has also soundly outperformed the precious metals sector in four of the past five years, including 2008, when Johnson's fund fell a relatively modest 24.9%, according to Morningstar.

The key to posting such impressive long-term results, says Johnson, is ignoring speculative short-term price moves, like the one that sent gold prices above $1,000 per ounce last March (recent price: $854).

Instead, Johnson and co-manager J. Dan Denbow try to dissect mining companies the same way they would manufacturers--on the basis of how well they're run and how profitable they're likely to be in the future.

Johnson analyzes 80 companies assuming all types of markets, and he buys only those he figures can survive bad ones. Since mining is capital intensive, these days that means digging up companies that can pay for operations largely without external financing.

It's also important to Johnson that a company is poised to cash in on the inevitable economic rebound. Over a decade ago, this philosophy led him to Agnico Eagle Mines, now the fund's largest holding. A Canadian outfit that excavates at home as well as in Finland and Mexico, it managed to raise $290 million in a private placement last December.

The move diluted existing shareholders, but it also gave Agnico Eagle the balance sheet it needs to cover capital improvements all the way through 2009. Its operating costs are below average, and it is building or deepening four mines that Johnson figures will quadruple gold production to 1.2 million ounces in 2010. That outlook has pushed up Agnico Eagle's stock 200% since USAA Precious Metals bought it, to a recent $55.

Keep reading at Forbes.com - Click Here