Gold Miners Still Undervalued – Potential for Serious Gains

Analysts are still heavily bearish on gold prices but not gold miners

Bullion.Directory precious metals analysis 9 August, 2014
By Christopher Lemieux
Senior FX and Commodities Analyst at FX Analytics

Gold bullion has been a flight to safety this year on the ongoing headline risk out of Ukraine and Middle East, with analysts still heavily bearish on gold prices but not gold miners. Gold miners have underperformed the price of gold throughout the 12-year bull run.

The Market Vectors Gold Miners ETF (GDX) has had a five-year annual loss of 7.61 percent and a three-year annual loss of 22.49 percent. On the other hand, the SPDR Gold Shares Trust (GLD) has had a five-year annual return of 5.74 percent and a three-year average loss of 7.97 percent, nearly a third less than GDX.

After the 28 percent decline in gold prices last year, gold miners have had to reinvent themselves to deliver better equity performance.

The steep, almost unexpected, decline in gold prices forced gold producers to implement austerity-like measures to stop from hemorrhaging cash. With lower margins, gold miners can now look to take on higher risk moves.

“The sort of risk we have taken on within the gold companies has changed as we get a little more comfortable that the gold price is stable to rising at that $1,250 to $1,350 level and that the companies themselves are starting to do the right thing,” said BlackRock portfolio managing director Catherine Raw.

Within the last eight months of 2014, gold mining shares are up 22 percent versus the nine percent increase in gold bullion.

The valuation for the sector remains highly undervalued, but it is prudent to make selective investments.

For instance, Barrick Gold Corp. (ABX), the world’s largest gold producer, is up only seven percent while Australian small-cap Northern Star Resources (NST.AX) is up over 120 percent.

“With gold mining stocks trading at a 58 percent discount to 2011 levels, gold miners’ shares remain highly undervalued relative to fundamentals,” according to Simona Gambarini, ETF securities associate director.

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