Gold Stocks Look Tempting Again

 | Sep 20, 2013 | 11:00 AM EDT  | Comments
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Stock quotes in this article:

abx

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au

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slw

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nem

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cde

The Federal Reserve surprised the world on Wednesday by deciding not to taper off its bond purchases for a while, and two dozen stocks with a market value of $250 million or more popped by 10% or better. Most of them -- 19 out of 24 -- were gold or silver stocks.

Among the winners were Barrick Gold (ABX) and AngloGold Ashanti (AU), each up 11%, and Silver Wheaton (SLW), up 10%.

On Thursday, the gold stocks gave up part of their gains, as did stocks in general. But Wednesday's jump could be a signal that gold mining stocks are becoming timely again. I say this with humility and hesitation. I lost a lot of money in these stocks, personally and for clients, in 2011 and 2012. But now I am considering giving them another try.

Gold bullion rose in price for 12 consecutive years, from 2001 through 2012. In that period, the cumulative gain was 523%, the annualized gain 16.48%.

This year, though, has been horrible for gold, with bullion prices down about 18% through Thursday.

Gold mining stocks move with the metal's price to some extent, but not as much as you might think. These are heavy industrial companies, which have to hire a lot of employees, move a lot of dirt, buy a lot of energy and in some cases pay a lot of interest.

One of their big problems is that gold is getting harder and harder to find. The deeper you have to dig, and the more hostile or remote the terrain in which you must operate, the less likely a deposit is to prove profitable.

While bullion was rising in price for 12 years in a row, several leading gold mining stocks rose in only six of those years. From 2001 through 2012, while bullion was rising more than 16% a year, Barrick Gold rose about 6% a year and Newmont Mining (NEM) about 12% a year. Investors have become disillusioned with the gold miners, and that is why I am again becoming interested. Valuations have come down.

Barrick Gold of Toronto, the largest North American producer, trades for 9x estimated 2014 earnings. Anglo Gold Ashanti of South Africa, goes for 11x. Coeur Mining (CDE), based in Idaho, is trading below book value (corporate net worth per share).

The monetary environment by itself may not be a sufficient reason to buy gold stocks. After all, the Fed was pursuing an easy-money policy while gold prices dropped in the past nine months. But on balance, I believe the monetary climate favors gold.

Turmoil in the Middle East could be another reason to buy. Military action in Syria seems less likely now than it did two weeks ago, but there a many hot spots in the region that could flare up. Gold usually, but not always, does well during international crises.

Add to this the fact that the performance of gold mining stocks compared to bullion is at a low ebb, and I think mining companies are becoming a promising speculation.

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