There’s a lot of value in the stock market today, and it’s commodity-related. But with expectations for declining economic growth in the world’s major economies, it’s easy to see why oil prices are around $85.00 a barrel, not $100.00.
Like the broader stock market, gold prices are holding up extremely well, and a big reason for this is the sovereign debt crisis in the eurozone. Gold prices should be a little lower than they are, but even if emerging economies continue to slow, I don’t see gold going much below $1,400 or $1,300 an ounce in the next recession. The risks in the global economy certainly outweigh the current economic fundamentals.
When gold prices were roaring higher, gold stocks were really moving. Gold mining companies were able to raise a lot of cash for expansion, and many producing miners are today sitting on strong cash balances. The stock market definitely approaches gold stocks with a herd mentality, and getting the timing right for taking on new positions is difficult. I’d be a buyer of gold stocks in this market and in the next U.S. recession, but immediate capital gains won’t happen if the spot price isn’t moving higher. Corporate fundamentals for many mid- and top-tier gold producers are excellent, and stock market valuations in this sector are attractive.
In silver, many producers are now hoarding their production, not selling their bars to the marketplace in anticipation of higher silver prices down the road. It’s a decent strategy and a form of hedging. Silver continues to underperform relative to gold, and because silver is used in a lot of industrial applications, news of slowing economic growth in the global economy is keeping the spot price subdued.
Stock market valuations for many gold stocks are very fair at this time. Gold stocks corrected with the rest of the stock market but didn’t recover as much due to the spot price and investor apathy. Institutional investors had a real fervor for gold mining stocks, but now they have no appetite for risk. This is why the best stock market performers in recent months have been big, brand-name companies that pay dividends. (See “Stock Market Correction: Why it’s Limited.”) Gold is still a component in large portfolios, but only a small one.
If we get continued mediocrity in the gold stock market sector, valuations are going to become compelling, and they will be worth buying. What you want in a gold mining investment is a strong management team, lots of cash in the bank, growing production, and low cash costs. The stock market offers lots of good options for gold investments, but nothing will go up unless the spot price does.