Friday , 18 August 2017


Is it Time to Load Up on Gold Stocks?

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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