Tags: gold | equities | stock

Gold Stocks: A Value Investor’s Dream

Friday, 09 Sep 2011 09:02 AM

By David Skarica

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Gold has soared to new all-time highs, reaching nearly $1,900 an ounce in recent weeks. But even after a few big pullbacks and volatile trading days, the metal has another powerful reason to rise, possibly breaking through $2,000 by the end of the year.
 
That’s because Swiss devalued their currency this week. This has yet again proved why gold is the ultimate safe haven — it cannot be printed or devalued by governments. It cannot be suddenly devalued, unlike the so-called safe-haven of the Swiss franc!
 
Although gold has been on a tear, the biggest source of frustration for gold investors has to be the gold stocks. For months they have been lagging. Despite gold breaking out to new nominal highs in recent months, gold stocks have lagged.
 
Part of the reason has been the equity markets. As stocks, the shares of gold miners can be dragged down by weakness in the markets. Frankly, gold stocks should show a stronger correlation to gold than equities. At today’s prices and with central banks buying up bullion, business is booming for the miners. Even with rising costs to mine for gold, sales and profit margins are expanding in this tiny industry (the top 10 players are less than the size of Apple).
 
However, I noticed a disconnect starting in August: Gold stocks are finallystarting to outperform bullion. I have believed all along that as long as we don’t get another 2008-style crash that gold stocks would disconnect from the stock market and go up (much they it did in 2007 or during the 2000-2002 bear market).
 
The Amex Gold Bugs Index (or HUI) has broken out to new all-time highs. On Thursday it closed at 634. It is in the midst of breaking out. I expect that in the coming months gold stocks are really going to catch up to the metal. By historical standards gold stocks are trading at very cheap valuations. Pick your valuation metric: P/E’s, price-to-cash flow, and prices compared to the price of gold are all near historical lows.
 
As gold stocks continue to breakout and the stock market remains in its rut, I expect gold stocks to attract capital as investors finally wake up and realize that gold stocks are the only game in town. Strength can attract capital.
 
I know that many people think that gold is at heady levels. However, the gold stocks are a cheaper, safer way to play the metal (most of the major miners offer dividend payments in the 1% range, competitive with cash). I expect them to play catch up and outperform gold in the coming months. Get ready for a wild and profitable ride.

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