- Major fund manager points to undervalued metrics for gold mining stocks
- Gold miner profitability increases much faster than the gold price
- Famed gold investor points to “most unbelievable margins ever”
As market darlings like
Apple (US:AAPL) and
Tesla (US:TSLA) suffer recent
violent reversals, sober voices are once again amping-up their warnings about the vulnerability of (in particular) high-flying NASDAQ stocks.
Buying on faith is a dubious investor strategy when the economy is strong and market valuations are reasonable. Chasing momentum when the real economy is a train-wreck and leading stocks have never been more overvalued is a recipe for investment suicide.
As we have reminded investors previously, there is a rational option to gambling on momentum: investing in value.
When it comes to “value” there is no stronger value proposition in the marketplace today than precious metals mining stocks.
While many S&P500 and NASDAQ stocks trade at insane multiples, gold mining stocks are relatively cheap. How cheap?
At the time the rally in gold and silver really took off (near the end of March 2020), gold mining stocks had
never been more undervalued relative to the price of gold.
Since then? Few analysts are better informed about mining stock valuations than the VanEck global investment group. This fund manager operates several gold mining ETFs, and CEO Jan van Eck refers to the company’s
“history paved in gold”.
Gold mining stocks provide natural leverage on the price of gold. We have pointed this out on many occasions. But how much leverage?
VanEck
recently offered some metrics.
An analysis of our senior/mid-tier universe shows that on average, an 11% increase in the gold price from $1,800 to $2,000 per ounce brings a potential 29% boost to free cash flow. Resources in the ground also become more valuable at higher prices. This may raise the value of a company, such that gold stocks generally have to outperform gold by over 30% in order for valuations to climb. We have yet to see such outperformance in this market.
At current price levels, miner profitability increases at
more than double the rise in bullion. That’s already strong leverage. And as prices rise further, it’s pure gravy for these mining companies.
VanEck explains.
VanEck pointed to fixed mining costs and any gold price increase being a “pure profit.”
Mining costs aren’t truly “fixed”, especially now that the Federal Reserve has officially
abandoned any ceiling for inflation. But over a shorter time-frame, relative to the price of bullion, costs are effectively flat.
How have these mining stocks actually performed since gold originally began trending higher in June 2019?
"Since gold broke out on June 20, 2019 into its current trend, the gold price has gained 45% and the NYSE Gold Miners Index 79%. However, this outperformance has not led to overvalued stocks," VanEck said in a Seeking Alpha post last week.
The value proposition is clear for investors to see.
Gold mining companies have more than doubled their profitability (>100%) over this period of time. Yet mining stock valuations have only advanced by roughly 75%.
That’s money on the table – waiting to be claimed by investors. While many mainstream equities have soared to outlandish multiples, gold mining stocks still deliver clear value.
Keep in mind that expectations among informed analysts are for much higher gold prices.
Pierre Lassonde is the founder of famed gold royalty company,
Franco Nevada Corporation (US:FNV / CAN:FNV). He is also one of the most astute observers of the gold mining sector and the gold market itself. As Lassonde points out, fueling profit margins even further is the glut of crude oil and depressed oil prices.
Mining is an energy-intensive industry and much of it still runs on oil. Cheap oil equates to especially strong mining margins.
NASDAQ stocks have soared to incredible heights simply by getting more and more and more
expensive. Thus these stocks are vulnerable to huge selloffs.
Gold mining stocks are capable of delivering far superior returns to NASDAQ bubble stocks – without ever reaching overvalued status.
With major indices at all-time highs and our economies in dire straits, the Smart Money is getting more and more defensive. But where can investors find shelter?
Urban real estate prices are also at all-time bubble highs. So are bonds.
The U.S. dollar itself has fallen to a multi-year low, even as increasing numbers of analysts question its future.
Under current circumstances – economies crumbling and asset bubbles everywhere -- gold (and gold mining stocks) would have appeal to investors at almost any price level.
In fact, History’s best safe-haven asset is currently a bargain. And gold mining stocks are even cheaper.
Playing defense has never been more profitable.
