Buy this miner to profit from the rebound in gold

This has been a rollercoaster year for investors in gold.

From last October, the price started to fall, with large drops in both April and June. By the start of July, the price had fallen as low as below $1,200 an ounce - the lowest level seen in nearly three years.

But now, prices seem to have stabilised, and turned around. Gold is now trading above $1,400 again.

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Here at MoneyWeek, we think there's always a place for gold in your portfolio. It's the best insurance against a mass loss of faith in the financial system, which remains a serious threat.

However, the plunge in the gold price has also flung up some very interesting opportunities in the gold mining sector.

Today I want to take a look at one in particular

Central banks will keep monetary policy loose

quantitative easing (QE)

However, as my colleague John Stepek points out, it is important to realise what the Fed is and isn't going to do. Firstly, the Fed's statement was always conditional on continued economic strength. And this is Ben Bernanke we're talking about. The Fed will err heavily on the side of keeping monetary policy as forgiving as possible, particularly if the market keeps throwing "taper tantrums".

In any case, it merely said that it would reduce the amount of assets that it buys each month, not stop QE entirely. This means that, whatever happens, money printing will still continue, even if at a slightly slower pace.

And in any case, other central banks may well end up taking up the slack from the Fed. The Japanese are already flooding the world with their own QE for a start.

And then there's Europe. There's been a lot of talk about how the European economy has turned a corner, with eurozone-wide GDP increasing. But let's not get carried away. As Capital Economics points out, growth is still barely positive and well below the level needed to pay down debts or create jobs.

In any case, the combined figures for the wider euro area hide real weakness in several countries. The Italian economy is still shrinking, while Holland usually seen as one of the sensible northern' countries - is currently in recession, with household spending plunging.

So, there's a still a very good chance that the European Central Bank will have to turn on the printing presses.

Asian consumers are snapping up gold

This confidence in gold as a store of wealth has been most pronounced in India and China. Despite government attempts to limit imports, including extra tariffs, the amount of gold imported into India rose by nearly half in the first half of this year.

And when you look at the catastrophic performance of the rupee this year so far and the government's feeble attempts to deal with it - you can see why your average Indian consumer would rather have at least some of their savings sitting in a barbarous relic like gold.

Similarly, the Chinese have also gone on a gold-buying spree. According to the World Gold Council, demand for gold jewellery went up by 54% year-on-year in the second quarter.

How to profit from the gold rebound

One share that looks particularly good value to me, is South Africa's DRDGOLD (NYSE: DRD). Most mining companies dig gold out the ground. This is high-risk because of the large capital costs and large chance of failing to find any of the precious metal. Get the geology wrong and you can quickly go bankrupt, especially if you only own a few mines.

DRDGOLD takes a different approach, treating the discarded rubble left by existing mines. This enables the company to extract any gold left behind after the original mining process, with a relatively high degree of confidence. The company is now also using nanotechnology to boost yields even further.

At the moment, the group owns the rights to re-mine over 100 waste dumps and dams. This means that its equipment is constantly operating (so no wasted downtime), and it also helps to spread the risk further.

Thanks to its relatively generous pay packets, which include a profit-sharing scheme, the company has largely avoided the round of strikes that have hit production in the rest of the South African industry.

The company is also thinking about using similar techniques to extract uranium as well, which would broaden its revenue stream.

And most importantly, despite its rising output, the stock is still extremely cheap. It currently trades at 7.9 times earnings. It also offers a solid dividend yield of 4.5%.

If you're interested in more gold mining opportunities, we wrote about the mining sector generally, and gold miners in particular, in MoneyWeek magazine last month. Also, my colleague Simon Popple writes a newsletter devoted to opportunities in precious metals miners you can find out more about it here.

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