Which Gold Stocks Should You Buy? Look at These Choices

So says Cris Frangold in edited excerpts from his article* posted on Seeking Alpha under the title Monetary Easing: 2 Gold Stocks To Buy, 3 To Avoid.

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!), has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.

Frangold goes on to say, in part:

The Historical Case for Gold Amid Monetary Easing and Inflation

Since 1984, increases in the price of gold have correlated with increases in the money supply. If this phenomenon continues today, money printing by multiple governments could boost gold stocks and gold itself as investors look to gold to give as a store of value.

In 1971, Richard Nixon ended the gold standard in an effort to stop the link between monetary and gold value, and said in a speech that the “American dollar would be worth just as much tomorrow as it is today.” However, 40 years later, the American dollar is only worth 17 cents, and this decline in purchasing power is widely used as an argument for gold as a superior store of value.

Who in the world is currently reading this article along with you? Click here

Before the gold standard was discarded, deficits rarely occurred, and when they did it was during extreme situations, such as war or depressions. During peacetime, and when an economy was “sound,” budgets were either balanced or deficits were relatively small. Since 1971, surpluses have been extremely rare. This is not a uniquely American phenomenon. The U.K. has had a yearly budget deficit for 50 of the last 60 years, and Spain has had deficit spending for 45 of the last 49 years.

Minding Profitability

Investors who want to reap excess returns must find the most compelling stocks, even in industries that experience significant tailwinds. The gold mining industry is no exception, and the price appreciation of gold miner stocks tends to lag the price appreciation of gold itself.

Gold miners are not magic profit machines. Instead, they become profitable by controlling costs and negotiating higher prices, just like other businesses. Industries whose firms have more bargaining power with customers, more bargaining power with suppliers, low rivalry between firms, few substitutes for their goods, and high barriers to entry tend to be more profitable. These factors are dubbed Porter’s five forces, and they characterize the profitability of an industry.

Despite the logic of this model many investors – including professional investors – crave firms in commodity industries like gold mining. They don’t seem to care that commodity producers are rivalrous because their products are fungible commodities, or that new competitors could spring up without any proprietary barriers to entry. These overzealous investors don’t seem to mind that suppliers to these firms like land-owners and union laborers can demand high prices. With this in mind, investors should not just buy gold companies at random.

HAVE YOU SIGNED UP YET?

• Go here to receive Your Daily Intelligence Report with links to the latest articles posted on munKNEE.com.

• It’s FREE and includes an “easy unsubscribe feature” should you decide to do so at any time.

• Join the informed! 100,000 articles are read every month at munKNEE.com.

• All articles are posted in edited form for the sake of clarity and brevity to ensure a fast and easy read. Don’t miss out.

• Get newly posted articles delivered automatically to your inbox.

• Sign up here.

Digging for Value

Many gold miners are Canadian companies. We can compare these Canadian firms exclusively to make comparisons more fair since they will be reporting using the same accounting standards.

The best investment among large-cap Canadian gold stocks is Barrick Gold (ABX), which recently traded near $42 per share. Don’t worry about missing the stock market rally: this gold industry large-cap stock declined in price 6.8% over the past year. Barrick Gold shares are trading at an attractive 10.15 price-to-earnings ratio, lower than the 14.1 average of the S&P 500 index. Its price-to-book multiple of this stock is 1.69, cheaper than the 2.05 S&P 500 average. Though Barrick’s 2.83 price-to-sales ratio is higher than the S&P 500, it is cheaper than many of its peers. Barrick’s attractive valuations are particularly nice since it is also the favorite gold miner among analysts.

Income investors will appreciate that Barrick’s stock pays a 1.92% dividend , more than the 1.64% 10-year treasury yield. Future dividend payments are likely because the company pays out 0.15 of earnings as dividends, so earnings could drop considerably before dividends must be cut.

Kinross Gold (KGC) is more of a speculative investment that trades at deeper values. This large-cap stock trades at about $11 per share after a 6.2% decline in price over the past year. There was net loss for the last twelve months, so the price-to-earnings ratio is incalculable. Its 2.97 price-to-sales is about the same as Barrick’s ratio. However, this firm is attractive because of its 0.95 price-to-book multiple, much cheaper than the 2.05 S&P 500 average. Though the firm often runs a loss, its reasonable 0.13 debt-to-equity ratio demonstrates that the firm is not overleveraged.

Yamana Gold (AUY) stock is too expensive at a price of roughly $19, a price level which seems impossible to justify. Higher valuations for this large-cap stock come in part from a 30.5% jump in price over the past year. Investors can buy more revenue per dollar from the S&P500 since this index has a price-to-sales ratio of 1.29 while this stock has a much higher 6.42 ratio. This ratio is more than twice the price-to-sales ratios of Kinross or Barrick. Yamana Gold shares are trading at a lofty 33.89 price-to-earnings ratio, a price multiple more than twice the 14.1 PE ratio of the S&P 500. Recent acquisitions, which have yet to pass feasibility studies, are too speculative to justify these price ratios.

Eldorado Gold (EGO) stock is also too expensive at a roughly $15 price level. Equity in this company is rich on a price-to-sales basis since shares trade at a 9.5 multiple, higher than the S&P 500 average of 1.29. Eldorado Gold shares are trading at a rich 29.35 price-to-earnings ratio, more than twice the 14.1 average of the S&P 500 index.

Another pricey Canadian gold stock is Goldcorp (GG). This large-cap stock trades near $46 per share. Investors can buy more revenue per dollar from the S&P500 since this index has a price-to-sales ratio of 1.29 while this stock has a much higher 7.0 ratio. GG shares are trading at a rich 27.82 price-to-earnings ratio, almost twice the 14.1 average of the S&P 500 index. These valuations are higher than those of Barrick even though Goldcorp does not rank as high among analysts. Therefore, it’s better to go with Barrick here.

Conclusion

Gold investors should consider buying shares of Barrick Gold as a solid investment and Kinross Gold as a more speculative investment. However, at today’s valuations, investing in other Canadian large-cap gold miners is not recommended. Investors should wait for lower valuations before considering them.

*Source of original article: http://seekingalpha.com/article/910631-monetary-easing-2-gold-stocks-to-buy-3-to-avoid

Editor’s Note: The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

Related Articles:

1. Why Gold Should Peak in June 2013 & Why 3 Stocks Should Outperform ALL Others!

The 21 month time frame for the next gold peak, the $30 trillion price tag for the debt, and the 64 month bull market fractal for money printing are all coming together squarely at the same date – June 2013. [That being determined, the best place to invest to take full advantage of the parabolic peak is in the stock of gold (and silver) royalty companies, or better yet, in the long term warrants of the two such companies that offer them. Let me explain my case.] Words: 1350

2. And the Heavyweight Gold Mining Company Champion Is…!

I have been asked which large cap gold miner is the overall best place to invest in this sector. There are currently five gold mining stocks with a market capitalization greater than $10 billion dollars so may the stock with the best fundamentals and future prospects for shareholders reign supreme! [And the winner is…] Words: 2248

3. Which Major Gold Miner Offers Investors the Greatest Bang for Their Buck?

Which major gold miner offers investors the most bang for their buck…depends on which metric you use to measure value, but one metric I like to look at is miner’s proven & probable gold reserves in relation to its market capitalization. This statistic offers investors a quick glance at how much the market is valuing each ounce of gold on a miner’s mineral reserve report. To make comparisons amongst gold miners more relevant, we’re only going to focus on Proven and Probable gold reserves, as inferred, indicated, and measured reserves may not even exist. So which gold miners offer the best value in terms of reserves? Let’s find out. Words: 850

4. Check This Information Out Before Investing in Any Senior Mining Companies

If you are interested in comparing the stats and ratings of companies operating in each of the commodity sectors you will find this analysis of great benefit in determining which company or companies to invest in. Words: 575

5. Surf’s Up: Here’s Specific Suggestions on How to Ride the Coming Wave of Higher Gold Prices

By looking at the charts and fundamentals for precious metals and the miners it is our firm belief that the precious metals sector has bottomed out and the downside is very limited from here on out. While there doesn’t seem to be an immediate rush back into the sector we believe that the worst is over and that now is a great time to be acquiring physical metals and, more importantly, producers with growth profiles. That’s where we really see the value and upside potential. [Let us provide you with a specific course of action.] Words: 792

6. It’s Crucial to Challenge ‘Commentator Credibility’ When Evaluating Gold ‘Mining’ Companies – Here’s Why

Every day now there is Media and Internet commentary on the current prices at which gold mining stocks are trading. Some of this commentary is excellent, some seems to be written from a “vested interest’ perspective and some is very simplistic. [This article discusses unstated underlying assumptions that some commentators base their views on, endeavours to provide a greater understanding of the gold ‘mining’ sector and influences on pricing of sector stocks and what investors need to do before investing in said sector.] Words: 2030

7. We Are Certain Gold Producers Will Soar – Here’s Why

For the past eighteen months, gold stocks have been pummeled…What’s going to move these darn stocks? Will their day ever come? Could our research – gulp – be wrong? Jokes have even started circulating…[such as] a) What’s the difference between a seagull and a gold stock investor? The seagull can still make a deposit on a Mercedes. b) Gold equities may be bad, but I slept like a baby last night. I woke up every hour and cried. Laugh or cry, however, underneath this heap of stock-certificate debris is the contrarian opportunity of a lifetime. That’s a strong statement, I know, but below I present numerous well-researched reasons why I’m convinced gold stocks are one spark away from igniting the portfolios of those with the cash to buy, courage to act, and patience to hold. Words: 2800