The gold bugs are stirring today. The surprise announcement by the Swiss National Bank that it is suspending its currency peg to the euro has brought out the gold buyers, at least temporarily. It is not hard to see why faith in fiat currencies would be slumping a bit given the Swiss move, the pending European Central Bank's stimulus programs, strength in the U.S. dollar against the rest of the world and the potential for Greece to exit the euro in coming weeks. I have friends who are die-hard gold investors and they believe that the world should be back on the gold standard. I do not usually share that belief, but some days the headlines do give one pause.
With the exception of a very poorly executed foray into gold futures in the early 1990s, I have never bought gold as an investment. I am in the Warren Buffett camp: Gold is not really an investable asset. Its worth is almost purely psychological in nature. It has no determinable intrinsic value and it is generally worth whatever the market says it is on a given day. The metals market and the nature of metals trading make very little sense to me, and I avoid the outright trading of the shiny metal at all costs.
But if the gold traders are right and the stuff is going to move higher in 2015 based on geopolitical and economic volatility, then the gold-mining business is going to get a lot better. If that happens, then many of the companies that mine for gold and other precious metals are deeply undervalued at current prices.
I have been a buyer in the last year of silver miners such as Coeur Mining (CDE), Pan American Silver (PAAS) and Hecla Mining (HL), but it may be time to consider gold miners as well. I have found over the years that silver miners are a little less volatile in their response to metal moves than gold miners are, but if gold is going up, then the gold miners are incredibly cheap.
If the price of gold and silver are going to move higher this year, it will increase both the profit potential and value of inventory for Compania de Minas Buenaventura (BVN), which has the potential to soar in 2015. The company explores for and mines gold and silver in Peru, and the stock is currently trading at just 75% of book value. The shares trade at about one-third of the level reached in 2013, and a sustained gold rally could easily take the price right back to those levels. The debt-to-equity ratio is just 0.12%, so the mining company has a balance sheet that should allow it to survive until we have a thriving gold market again.
I am far from an expert on gold and metals trading, but I am pretty good at valuing a business and I'm smart enough to know that many people out there are even better at it than I am. One such investor is Donald Smith & Co., a deep-value investor attracted to the current bargain valuation of gold and silver miners. Smith has been buying shares of Kinross Gold (KGC) at 60% of book value, Yamana Gold (AUY) at 50% of book and HudBay Minerals (HBM) at 80% of book in recent months. The firm also has positions in AuRico Gold (AUQ), Allied Nevada Gold (ANV) and Primero Mining Corp. (PPP), all of which sell well below book value.
Jean-Marie Eveillard is a long-term value investors who has a solid record with gold stocks, and I have no problem saying that he knows more about value gold-mining companies than I ever will. His funds have been buying Barrick Gold (ABX), Goldcorp (GG) and Kinross Gold at discounts to book value in the last six months or so. If gold and silver prices firm, these stocks should see book value and stock price move higher this year.
I have no clue if gold will follow through on the recent strength. I do know that financial markets and currency values are becoming increasingly volatile as we start 2015, and that usually brings out gold buyers. I have heard the term "fiat currency" three times on CNBC before 11 a.m., so the gold buyers appear to be stirring from their 2014 slumber. I have no idea what gold is worth on its own, but it seems clear to me that if gold and silver prices move higher than the companies that mine and process the metals, they are going to be worth more.
