The price of gold has roughly doubled since 2007, yet the price of the companies that mine the stuff is the same as it was back then. Why? Maybe this explains it:
(Click on the image for a larger version.)
As the analysts at BCA Research write:
Gold stocks have been cannibalized by the surge in ETF volumes, with P/E multiples moving inversely with ETF flows. Part of the reason is that during times of extreme risk aversion and safe haven demand, investors prefer physical gold.
As I’ve said before, gold miners have unique difficulties — uneven cash flow, working in dangerous regions, extraction costs — which mean they’re not an accurate proxy for the metal’s price. And, thanks to ETFs like SPDR Gold Shares (GLD), you don’t have to play the proxy if you want gold.
Nevertheless, BCA believes that this year could be the breakout for gold companies — they don’t give names, but think Barrick Gold (ABX), Newmont Mining (NEM) or AngloGold Ashanti (AU):
Investor disappointment over the past three years has left gold equities cheap, unloved and under owned. The final catalyst for gold shares may well be intense investor pressure to contain cost overruns and focus on efficiency. Six gold mining CEOs lost their jobs in 2012.
Such shakeups usually herald a major shift in corporate strategy, and gold equities could do well, even if gold prices go nowhere.
Bottom Line: Remain tactically long gold shares/short gold and strategically long gold equities.
As I’ve said before, I’m not convinced that 2013 will see the bucking of the trend we’ve witnessed in recent years, and that gold miners will start popping. Then again, the influx of new CEOs does suggest the industry may start performing better, and if the market remains bullish these typically volatile stocks may become increasingly attractive as the appetite for�risk grows.
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