[Editors Note: The Second of Two Parts. To Read Part I of this story, please click here].

If you were a gold investor back in the good old days of 1895, life was pretty easy. You’d spend the day in a huge leather armchair at your London club, sipping fine brandy. Periodically, a servant would telegraph buy-and-sell orders to your broker as you played the "Kaffir" gold-share-boom of that year.

You would avoid political risk by investing only in gold mines located in British colonies. And you wouldn’t worry about the price of gold, either – it was 3 pounds 17 shillings and 10 pence an ounce – and had been since Britain went back on the Gold Standard in 1819.

Back then, you had but two worries. First, did the mine contain any gold (engineers’ reports were crucially important)? Second, was the mine developer such an out-and-out crook that none of the profits would reach you?

It was a very simple business model. The price of gold was the price of gold, the mining cost was the mining cost, and if the difference between the two was positive, profits would flow into your pocket.

Today, of course, it’s quite a bit different. Modern finance has intervened with long-term futures and options contracts.

As a result, we still know the market price of gold, but we don’t know the price at which gold mining companies are selling their gold!

For example, gold miner AngloGold Ashanti Ltd. (AU) has recently "sold forward" three years of its gold mine output for a set price of $600 an ounce, regardless that the market price is now ranging upwards of  $750.

This process is known as "hedging." And I understand why gold miners do this. The executives want to make sure their jobs, and the jobs of its miners, are secure – even during a gold-market downturn.

However, investors don’t care much about preserving the jobs of gold miners, let alone those of mining company executives. We want to know what we’re getting in the form of earnings and dividends – and we want to benefit from a rise in gold prices.

The bottom line is that to invest in gold mines today, one must read a lot of boring and incomprehensible accounting footnotes – and must hope that the mining company isn’t in a jurisdiction where they don’t need to disclose the facts those footnotes usually contain. We’re also fortunate that hedging – very fashionable a few years ago – has decreased in use as gold prices have soared.

And gold prices are projected to keep rising. So let’s take a look at the world’s largest gold mining outfits that U.S. investors can easily buy into, either directly, or through American Depository Receipts (ADRs).

Of course, for the highly risk-averse investor who still wants to invest in gold, the simplest strategy is to buy an exchange-traded fund, or ETF. The StreetTracks Gold Shares Trust ETF (GLD) invests in gold directly and is a good bet.

But for Money Morning readers looking for higher potential returns, here’s a look at the major players, along with my five "best bet" recommendations:

• Barrick Gold Corp. (ABX) is a Canadian company with mostly North American production. It has some operations in South America and Africa, and mines copper and zinc, as well as gold. It has a $36 billion market cap, so there’s plenty of liquidity. The shares are trading at a trailing P/E of 34 (on the last 12 months’ earnings), but a forward P/E (on next 12 months’ profits) of 20. The company has eliminated its forward hedging program. By gold mining standards, this company is substantial in both size and scope, is reasonably valued, and features very little political risk.

• Agnico-Eagle Mines Ltd. (AEM) operates a gold mine in Northeastern Quebec, so there’s no political risk – unless Quebec separatism worries you. $7 billion market capitalization. Trailing P/E 46, forward P/E 44. You can pay too much for a nice location.

• AngloGold Ashanti Ltd (AU) is a South African company with operations in Argentina, Australia, Brazil, South Africa and West Africa. It has a market cap of $12 billion, a trailing P/E of 34, and a forward P/E of only 17. The good news: I like the diversification. And with its medium political risk, it’s reasonably priced based on next year’s projected earnings. The bad news: It has sold forward three years worth of production at a contract price of $600 an ounce. These contracts already have a value of minus $2 billion, and that negative value will increase as the price of gold rises. Stupid people, but bear in mind that this company’s earnings will jump if they ever manage to get rid of the hedges.

• Yamana Gold Inc. (AUY) is a Canadian company with operations in Brazil, Argentina, Chile, Honduras and Nicaragua. It is spending the equivalent of $3.8 billion in cash and stock to take over Meridien Gold Inc. (MDG), which has operations in Chile, Mexico and the United States. Yamana’s market cap is $5 billion, and its shares trade at a trailing P/E of 64, but a forward P/E of only 13. There’s a middling political risk, and a bit of an added business risk, due to the Meridien takeover. Investors can look forward to production doubling to 2.2 million ounces per year by 2012, primarily in Brazil and Argentina. I like this one, too, though the added risk of the Meridien acquisition should be kept in mind.

• Gold Fields Ltd. (GFI) is a South African company with mining operations in South Africa, Ghana, Australia and Venezuela (of which they just sold control to a local company). The company has a market cap of $12 billion, a trailing P/E 31, and a forward P/E 20. Upper-medium political risk, depending on what you think of South Africa. My view is that South Africa is acceptable currently, but there’s a good chance of Jacob Zuma winning the Presidency in April 2009, and he’s a nasty anti-Western leftist with a criminal record. On the other hand, that’s 18 months away, and the gold surge will probably have played out by then. GFI doesn’t hedge the gold price, which is a plus.

• RandGold Resources Ltd. (GOLD) is an offshore British company that mines in Africa (but not South Africa). The political risk is medium-high. With a market cap of $2.4 billion, a trailing P/E of 62 and a forward P/E of 31, this stock is expensive, especially given the elevated political risk.

• Harmony Gold Mining Co. Ltd. (HMY) is a South African company, with gold, copper and uranium mines, and operations in South Africa, Australia and Papua New Guinea. There’s only a medium-level political risk here. The company has a market cap of $3.8 billion, and the shares feature a trailing P/E of 79 and a forward P/E of only 17. The company does not appear to hedge, but that’s not a statement I can make with certainty. This miner has made some losses in recent quarters (theoretically, very tough to do at current gold prices). Given the losses, I’d have to regard this one as overpriced.

• IAMGOLD Corp. (IAG) is a Canadian company that mines primarily in Canada, Surinam, Ghana and Mali. Despite some of those exotic-sounding locales, the political risk is low-to-medium. The company has a market cap of about $2.4 billion. Though the shares trade at a forward P/E of about 22, the company has a trailing loss. Given that loss, the shares should be considered expensive.

• Kinross Gold Corp. (KGC) is a Canadian gold-and-silver miner, with primary operations company in Canada, the United States, Brazil, Chile and Russia. Kinross issued shares to buy a large Brazilian/Russian company in February. The market cap is big at $10 billion, the political risk is low to medium and the company doesn’t appear to hedge. However, with a trailing P/E of 35 and a forward P/E of 24, the shares appear a bit on the expensive side.
• Lihir Gold Ltd. (LIHR), a Papua New Guinea-based company, operates in PNG and explores in Australia. Given that some PNG miners have had some problems, there’s a mid-level political risk here. And with a market cap of $7 billion, a trailing loss, and a forward P/E of 29, this stock looks overpriced, too.
• Newmont Mining (NEM) is one of the better-known miners, based in the United States and operating in the U.S., Australia, Peru, Indonesia, Ghana, Canada, Bolivia, New Zealand, and Mexico markets. The political risk is low. It has a market cap of $21 billion, a trailing loss and a forward P/E of 26. Newmont used to hedge, selling gold at $384 an ounce, but closed out its positions, took the loss (from the contracts as well as losses related to a fatal accident at its Midas mine in Nevada) and now operates un-hedged. Not a bad value, but Barrack looks better.

Royal Gold Inc. (RGLD) is a U.S.-based company, with operations in Nevada, Mexico and Argentina. The political risk is low. But with a market capitalization of $930 million, a trailing P/E of 41, and a forward P/E 35, this stock looks expensive.

Having taken this tour of the global gold-mining industry, and having evaluated the key players, the best values appear to be:

#1: Barrick (ABX).
 
#2: Yamana (AUY).

#3: AngloGold (AU) (an attractive play if you don’t mind its excessive hedging and South African political risk).

#4: Newmont (NEM).

#5:  Kinross (KGC) would be my final choice.

And, of course, don’t forget the bonus: the Gold Shares ETF (GLD).

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Readers may well have missed the news that Ukraine is currently putting together a new coalition government led by reformist Julia Tymoshenko.

“So what?” you may ask. “I can’t know everything. And besides, how do you ever expect me to make a buck out of Ukrainian politics, a murky affair at best?”

Well, let me tell you a secret to emerging markets investing: The really big returns are made by spotting new markets as they begin to emerge, and then surfing the long wave of their emergence. The story of the independent countries that split from the Soviet Union is mostly a sad one, but there are a few gems beginning to emerge. There isn’t much to plunge into yet, particularly as a U.S. investor, but they’re well worth keeping an eye on.

Beginning first with all those confusing ones called “-stan” – I have to look up whether there are four or five of them. Uzbekistan, Tajikistan and Turkmenistan are backward dictatorships with few redeeming features, only modest amounts of resources and close ties to Vladimir Putin’s mob in Russia.  Kyrgyzstan is an emerging semi-democracy, with an almost functioning free market. Alas, it has only 5 million people, a puny Gross Domestic Product (GDP) of $10 billion, a modest growth rate, and no oil.

Kazakhstan’s the one with the oil. Unfortunately, it also has one-party government, high corruption and close ties to Putin. Nevertheless, with 15 million people, a much chunkier GDP of $53 billion and a growth rate of 10.6% in 2006 there’s money being made there. It has oil pipelines to the Black Sea and to China, so it’s not dependent on Russia to get its principal export to market. An international consortium led by Italy’s Eni SpA is currently drilling at the Kashagan oilfield, a huge project expected to have cost $130 billion by the time it comes on-stream in 2010. Since the Kazakh oil company Kazmunaigaz is state owned, Eni, itself (E), which has a price-earnings ratio of only 10 (well, NOBODY trusts the Italian government, which owns 39% of Eni), is worth looking at – what’s more, you get to share Eni’s new investment in Libya, another fun place with lots of oil!

The Baltic States – Estonia, Latvia and Lithuania – are well known; all three are now members of the European Union (EU), and have enjoyed rapid growth. They’re small, though, and there’s not much for U.S. investors to buy there. Estonia is the most exciting, with a growth rate of around 8%; Latvia, with a similar growth rate, also has a huge balance of payments deficit, which is rather worrying. Lithuania is growing somewhat less fast, and is the least glossy of the three.

Story Continues Below…

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Armenia and Azerbaijan fought a war with each other only a decade ago, which doesn’t fully rule them out, but is still a factor to be considered. Armenia has a population of 3 million, a GDP of $6 billion, and a 13% growth rate; Azerbaijan has a population of 8 million, a GDP of $14 billion, and had an astounding growth rate of 34% in 2006 – that’s what opening a new oilfield will do for you. Unfortunately, neither country has any companies with American Depository Receipts (ADRs), nor does there seem any obvious way to play them – BP PLC (BP) is the most important oil company in Azerbaijan, but it’s a small part of its business.

Then there are the two non-Baltic, ex-Soviet republics that are showing signs of becoming real democracies: Georgia and the Ukraine (though Armenia and Kyrgyzstan are fairly close).

Georgia is small – 4.6 million people and a $5.3 billion GDP – but it has a splendid pro-free-enterprise government under Mikheil Saakashvili and a growth rate of 9.3% per annum that is dependent on real effort, not just oil prices. The other good news about Georgia is that it is the least corrupt country in the former Soviet Union (except for the Baltic states). Alas, that’s a bit like saying someone’s the least evil mobster in the Bambino crime syndicate, but at #79 on Transparency International’s Corruption Perceptions Index, Georgia is only just below India and China. The Bank of Georgia is probably the best way to play the country; regrettably that is listed in London (BGEO) but not in the US.

The Ukraine is much larger: It’s got 46 million people, an $82 billion GDP, and had a decent growth rate of 7% in 2006. For those who haven’t been following, Ukraine’s shaky democracy has recently been the scene of a huge tug of war between the pro-Russian east and the pro-Western, pro-democracy west. The Orange Revolution of December 2004 was supposed to mark the victory of pro-free market forces, but President Viktor Yushchenko proved feeble, and his first democratic government, with Julia Tymoshenko as prime minister, experienced its demise.

Since then, there has been an uneasy coalition between Yushchenko, as president, and the Putin-supported Viktor Yanukovich as prime minister. However, in last month’s election Tymoshenko – once again allied to the remnants of Yushchenko’s support – won a small-but-decisive majority and now seems poised for form a government.

Julia Tymoshenko made an oil-and-gas fortune in the 1990s, and is a very tough cookie. Imagine a cross between Madonna and Hillary Clinton and you have her style. (Amusingly for onlookers, there was a very old-time-Chicago series of delays in counting the election results, as first Donbass, controlled by Yanukovych, and then downtown Kyiv, controlled by Tymoshenko, had unexpected delays in announcing their results – in each case, a landslide for the local favorite with suspiciously high turnout!).

Putin hates her, which is a worry since Russia, through Gazprom, has the ability to turn off Ukraine’s heating every January. Fortunately, in doing so, they turn off half the EU’s heating as well, so there may be limits on how rough Putin wants to play.

However, Tymoshenko understands how a free economy works, and is determined to clean up the corruption in Ukrainian business, so prospects for Ukraine’s emergence currently look good. Don’t forget, the country has a 99.4% literacy rate and 15% rate of college graduations, yet a per capita GDP of only $7,800 – even at purchasing power parity – so there’s a hell of a lot of room for growth.

Like the other ex-Soviet states, Ukraine doesn’t have a lot of ADRs. It makes sense for a country with EU ambitions to list its shares in London first, but the hugely expensive requirements of the Sarbanes-Oxley Act must also be a factor. Even when ADRs are available, they don’t trade – the big electric power company Centrenergo (CTEUY.PK), for example, last traded 3 months ago. What’s more, there aren’t any mutual funds with more than a small share of their investments in Ukraine.

That’s bound to change, however, as the country opens up. We at Money Morning will keep an eye on the Ukraine, and will report back to you if and when their rapid growth inevitably brings investment opportunities. When that happens, the Ukraine will probably be well-worth buying.

Even in the apparent basket cases of the non-Russian former Soviet Union, there are growth opportunities and investments worth buying. The wise emerging-market investor must cast a wide net.

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Australia has had an excellent run in the last decade, benefiting from sound economic policies and rising natural resource prices. While the economic policies may be about to change, Australia’s innate natural resource strength will only increase as demand from East Asia grows. That means that only some Australian investment strategies will work. Which ones, we’ll soon see.

Australia is not like Canada, which we chronicled two weeks ago. Both of Canada’s political parties are committed to the free markets, its unions are relatively weak and the left generally focuses on cultural rather than economic issues. In Australia, however, unions are strong and the Australian Labor party is from time to time genuinely anti-capitalist. Conservative Prime Minister John Howard, in office since 1996, has done a great job, but he is facing election, probably next month, and he may well lose. The Labor opposition, under Kevin Rudd, plans to appoint a number of union leaders to the cabinet, and is threatening to raise taxes and reverse many of the reforms that have produced Australia’s economic dynamism.

Australia’s manufacturing economy – like Canada’s – is not overly impressive. Australia’s manufacturing sector suffers from its distance from major markets, from union problems and from the competitiveness of Asian manufacturers in present the Australian market.

Agriculture, traditionally an Australian strength, now represents only 3.8% of Australia’s $645 billion Gross Domestic Product (GDP), although meat and wool are still the country’s No. 2 and No. 3 exports. The real estate and construction sectors have been strong for the last few years, but Australia is now suffering through the same housing-bubble hangover as other key markets around the world (such as the United States).

Australia’s Natural Resource Muscle

The Australian dollar recently touched 90 cents against the U.S. dollar, a level not seen in 23 years. It has been lifted not by a favorable payments balance (Australia currently runs a payments deficit equal to 6% of GDP), but by two other factors: speculation and natural resources.

The speculative effect is quite clear. Since Australia has somewhat higher interest rates than the United States, the Australian dollar has been a favorite target for the hedge funds’ "carry trade" strategy, under which they borrow yen at short-term rates below 1%, and lend in higher-yielding currencies – pocketing the interest-rate spread as the profit. That speculative trade has been a highly profitable maneuver for more than two years. But it cannot last forever. At some point the Bank of Japan will raise interest rates (BOJ policymakers voted once again last week to keep rates steady) to make this trade less attractive, the yen will rise and the Aussie dollar will fall as carry-trade positions are unwound -and quite rapidly, too.

Australia’s natural-resource wealth is globally well known. Most of its natural-resource muscle is in minerals and agriculture; it is a net importer of oil, although it does export a little natural gas. In energy, Australia has 23% of the world’s uranium reserves – more than Canada – and it has a natural market for its output in China, which is moving more strongly into nuclear energy as the pollution and global warming problems of its existing coal-fired power stations escalate.

Australia’s No. 1 export, worth $21 billion in 2006, is coal, mostly shipped to the rapidly growing economies of East Asia. Coal production and exports have climbed steeply. The principal bottleneck is the port of Newcastle, New South Wales. In May, New South Wales became a global case study of the world’s overheated coal market, reporting record turnaround delays of over a month: At one point, no fewer than 79 ships were awaiting servicing.

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Needless to say, port expansion is a top priority. But that takes time.

Mining remains an extremely important Australian industry. Its major exports are gold, alumina and iron ore – the prices for all of which have more than doubled in the past few years on the back of exuberant Asian demand.

Where to Profit?

Australian industrials are not very interesting, particularly with the threat of a Labor government and stronger unions, as well as the reality of a strong Australian dollar – all factors pushing up relative production costs. As with the U.S. market, construction and finance should currently be avoided. Agriculture and agricultural commodities could be attractive, but none of the major Australian agribusiness companies have ADRs, so it’s difficult for U.S. investors to participate.

That leaves mining and energy. There are no pure Australian uranium plays, but Rio Tinto PLC (RTP) has a very large Australian operation, active in both uranium and metals, and also has a very large uranium operation in Namibia and major aluminum production through its planned $40 billion purchase of Canada’s Alcan Inc., (AL).

That deal is to close in the fourth quarter.

In coal, the largest producer is BHP Billiton Limited (BHP), which also has huge operations in iron ore and South African gold. This makes it a well-diversified exposure to the mining sector.

Another well-diversified, purely Australian mining company is Alumina Ltd. (AWC), which is active in nickel, copper, uranium, gold and fertilizers. It also has a joint venture with U.S.-based Alcoa Inc., (AA), that ranks as Australia’s largest bauxite miner and aluminum smelter.

Rio Tinto, BHP and Alumina are all trading at Price/Earnings ratios in the mid-teens, based on their recent bull-market earnings, making the shares rich, but tolerable.

Since energy and mineral prices are currently rising even faster than the Australian dollar, Australian minerals and energy companies should be well hedged against a further rise in the currency, which brings increasing costs to Australian production. Given the political and currency risks, it’s probably best to concentrate Australian investments in these sectors.

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