By Tim Wood
Senior gold stocks are trading at their most discounted values since the depths of the 2008 credit crisis and its wake into Spring 2009. The recent selloff commenced at the start of the year and has driven equities values down to levels that are more suggestive of gold prices at around $1,250 per ounce, or some $100/oz lower than current prices. That raises the question whether gold stocks are a screaming buy or gold bullion is a screaming sell.
There is some reason to worry about the latter, given the leading indicator that equities have been; sell-offs presaging declines in the gold price. It is also consistent with currency analyst views forecasting a stronger dollar in the first half of the year. On top of that, we know that gold is seasonally more attractive from the third quarter, so it’s entirely plausible that bullion could correct significantly this quarter.
Gold has also been trading expensively relative to oil and platinum, though it appears moderately under-priced against silver.
Contra-indicating are the gold ETFs, though, which are maintaining a healthy leverage premium to gold, although there has been some softening.
On a monthly average basis, gold equities represented by the thirteen largest mining companies (by a combination of market capitalization, production, and reserves) have never been cheaper except for October and November 2008. There were brief dips lower in April 2009 and February 2010, but the character of the current de-rating is different for its intensity and is more akin to the 2008 panic selling
Investors should be careful about a simplistic assumption about values.
If you prefer the view that gold stocks lead the gold price, then equities are only going to become more expensive in relative terms as they wait for the gold price to fall in line. In the meantime, they could continue to become cheaper in price even as their leverage to the gold price recovers. So timing will be critical.
Another crucial element to watch is the world price of gold, as measured by a basket of currencies.
For the first time since July of last year, the monthly average appears at risk of declining. The euro component of the index is the most important benchmark and it is flirting with a fall below 1,000/oz after a long run above that level. Euro gold has been a strong equity price driver over the past year.
Overall there is an unresolved problem with gold equities which have yet to find an obvious and definitive bottom relative to movements in the gold price. The market remains unconvinced at this time about their ability to add value. That is primarily because of expected input cost inflation underpinned by high energy prices. Notably, crude oil prices averaged more than $90/bbl in December for the first time since September 2008. Most other industrial commodity prices have moved up into the range of their 2008 peak prices.
The MineFund Gold Equity Index peaked at a total value of $260 billion on 6 December 2010 when the gold fix hit $1,415/oz. It closed on Friday at $228 billion; a loss of $31.4 billion in 31 days. That’s equivalent to losing all of the number three ranked stock by market capitalization - Newcrest.
Ominously, nearly all of the stocks have broken through the 200-day market cap moving average, and the only one showing relative strength is Gold Fields (GFI).
[[wysiwyg_imageupload:1357:]]
[[wysiwyg_imageupload:1359:]]
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Tim Wood