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By almost any measure, gold stocks are undervalued but should we load up? Gold mining
companies are earning record margins. Stock prices, however, have not responded in similar fashion but when the broader investing community begins to take notice, investors will snap up these highly profitable stocks and push prices higher. The “catch up” in gold stocks could be tremendous but the question, of course, is timing. We don’t know when gold stocks will begin to catch up and the data don’t suggest they must rise right now or that they’ve hit bottom so should we load up just now? Words: 590
So asks Jeff Clark (www.caseyresearch.com) in paraphrased comments from an article* which Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has edited ([ ]), abridged (…) and reformatted below for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.
Clark goes on to say, in part:
Falling HUI:Gold Ratio
Gold accelerated higher last month, peaking around $1,900/ounce, while gold stocks lagged. Here’s a chart of the HUI-to-gold ratio (HGR). In a rising gold environment, a climbing HGR indicates that gold stocks are outperforming the metal; a falling HGR means they’re trailing gold.
Today’s 0.33 HGR means gold stocks as a group have not been this cheap, relative to their underlying metal, since January 2010 and a lower ratio hasn’t been seen since February 2009, when recovering from the 2008 global meltdown. Also consider that the GDX (Gold Miners ETF) is about the same price as last December, while gold is up 30%.
Soaring Margins
I think there’s a more compelling situation that demonstrates the undervalued nature of gold stocks. It’s hard to read a mining company’s quarterly report these days without hearing about “growing margins.” The gold price has risen faster than operating costs across our industry and lifted profit margins of the better-run producers.
Higher margins are key to growing earnings and cash flow, which in turn lead to rising stock prices. Have gold mining equities kept pace with ever-increasing margins?
Gold mining companies are earning record margins, averaging a whopping $1,268 per ounce last quarter. In both nominal dollars and percentage above costs, margins have never been this high for the gold producers. Stock prices, however, have not responded in similar fashion.
This is a potentially significant point, because margins of this magnitude will be ignored only so long. When the broader investing community begins to take notice, investors will snap up these highly profitable stocks and push prices higher. The “catch up” in gold stocks could be tremendous…
Conclusions
We’re in the right place but the question, of course, is timing. We don’t know when gold stocks will begin to catch up and the data don’t suggest they must rise right now or that they’ve hit bottom. Contributing to their price weakness is concern that the recent surge in the gold price isn’t sustainable. I can also tell you that we see the risk of another significant decline in the broader markets as a distinct possibility, and if one materializes, gold stocks could undergo a temporary swoon.
We’re convinced they’ll someday hit lofty levels, but for now we maintain the same refrain: keep one-third of assets in cash. This reduces risk and gives us a nice pile of funds to deploy during any selloffs…
*http://www.caseyresearch.com/articles/it-time-load-gold-stocks
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