Gold Stocks Lagging the Spot Price—Time to Buy

Gold Stocks Lagging the Spot Price—Time to BuyOn the stock market, gold stocks recovered from their recent correction, but they are still lagging the recovery in the spot price of gold. The same goes for silver stocks, whose stock market performance is even more behind the spot price action. Institutional investors have lost a lot of their affinity for gold stocks, even though they still might like gold’s long-term prospects. In many ways, speculating in gold stocks is higher risk than just buying gold if you believe the spot price is poised to advance. Of course, the stock market return potential is greater with gold mining companies, but there are a lot of factors at play beyond your control as an investor.

There are a lot of options now if you want to express a position in gold, for example. There are all kinds of leveraged funds, which can double the returns (or losses) generated by the changes in the spot price. Many of them trade in the form of exchange-traded funds (ETFs) on the stock market, and they aren’t a bad way to go if you believe the spot price is going to move.

The actual number of attractive gold mining companies that trade on the stock market is very small, in my view. (See “Gold Stocks Becoming a Great Value in This Market.”)

Everything within the sector becomes more attractive when the spot price is soaring, but if you own gold mining companies, you want the ones that hold up on the stock market when the spot price doesn’t. There aren’t that many of them around.

The reason for this is that the business cycle in gold mining is very long. From prospecting to exploration drilling, and from feasibility studies to production, it takes a lot of time and money to make a gold mine happen, even with the most attractive of gold deposits.

Like I say, there are very few really attractive gold mining companies that trade on the stock market right now. It’s quite difficult to find a company that’s consistently announcing record production, revenues, and earnings with the spot price of gold in consolidation. And not surprisingly, the best stocks in gold mining tend to have the highest earnings multiples.

Because gold stocks are lagging the spot price, and the fundamentals for higher gold prices continue to improve, I think speculative investors can now invest in the sector again. We knew there was going to be a big correction in spot gold and gold stocks; the commodity accelerated strongly since the beginning of 2009 and has been in an uptrend for the last 10 years. Spot gold moved nicely above $1,600 an ounce on speculation that the Federal Reserve will take some new monetary action, which pressured the U.S. dollar. The stock market action in gold should catch up to the spot price, but only when institutional investors return to the sector.