The spot price of gold has been in correction for the last couple of months. Gold stocks have also been correcting and I think the stock market is setting up the sector for a strong advance in the first half of 2012. The fundamentals for gold and gold stocks just keep getting better and, now that central banks are coordinating even more liquidity to capital markets, the easy money will help boost global inflation rates.
According to Eurostat, which is the eurozone’s main statistics agency, the current inflation rate in the 17 countries that use the euro currency is running at three percent, while most of these economies are producing little to no growth. Unemployment in the eurozone was 10.2% in September and 10.3% in October and interest rates are falling. It’s the perfect brew for rising inflation.
In a report written by Thomas Biesheuvel at Bloomberg, gold stocks are said to be now trading at their cheapest valuation in the last nine years, even though the spot price of gold is trading close to its historic high. Everything in the stock market has been correcting in price and there’s a lot of good value out there, but no industry is poised for the same rate of earnings growth as gold.
The stock market experienced a price correction due to the European debt crisis and that brought gold stocks down commensurately. But, instead of snapping up reasonably priced gold stocks, gold investors have been buying gold exchange traded funds (ETFs) instead. According to Bloomberg and the Commodity Futures Trading Commission, holdings in gold ETFs grew to a record 2,350.8 metric tons, worth $127.6 billion as of last week. Hedge funds and other institutional speculators have been increasing their net-long position in gold over the last four weeks straight, which is the longest stretch since March. See Stock Market Correction Phase Over? Spot Price of Gold Looks to Be Bottoming.
So, we have positive, developing fundamentals for gold and gold stocks that are undervalued and poised to report record financial results in the fourth quarter. Now is the time to be considering new positions in gold stocks (if you haven’t already), perhaps more so than an ETF that moves with the spot price. Regardless, it’s pretty clear that the stock market has underappreciated the financial performance of most larger-cap gold stocks over the last several months.
The stock market’s latest correction was fostered by the European debt crisis, but what transpired was a severe reduction of confidence—in the prospect for global growth and the ability of eurozone policymakers to deal with the problem. Accordingly, stock market investors have been extremely reluctant to speculate in gold stocks, which I admit is a stock market sector that tends to be highly volatile and unpredictable. If the debt crisis in Europe can be contained, at least for the next few quarters, then I think gold stocks are extremely well positioned for capital gains. Valuations are reasonable and earnings expectations are strong. Investment risk still remains very high in the stock market at this time, but there are very few industries with fundamentals as strong as gold and precious metals.