Gold Stocks: The Biggest Buying Opportunity in 25 Years

by Mike Kapsch

Don't look now but gold stocks are cheap, really cheap.

Just take a look at this chart:

Company Ticker Value of Proven Gold Reserves* (in billions) Market Cap

(in billions)

Barrick Gold Corp. ABX $50.6 $32.7
Goldcorp Inc. GG $40.7 $28.9
Newmont Mining Corp. NEM $46.1 $21.4
Kinross Gold KGC $36.4 $9.4
Yamana Gold, Inc. AUY $14.6 $12.2

(*Proven gold reserves calculated with gold price at $1,655/oz.)

Today, a number of major gold miners trade for even less than the actual amount of gold they have on hand. That excludes probable reserves.

It also leaves out any other mineral reserves these companies have. For instance, Goldcorp produces silver, copper, lead and zinc - in addition to gold. Meanwhile, Yamana also mines silver, copper, zinc and molybdenum.

The bottom line: Right now could be one of the best buying opportunities you'll ever find for some of the world's biggest gold miners.

In fact, as The Wall Street Journal reports, "The price of an ounce of gold today would buy more stock in gold-mining companies than at any point in a quarter century."

But what has kept gold stock valuations so low? And what makes gold stocks a worthy investment to consider today?

Let's get to the details.

The Downside

Last year, Nick Holland, CEO of Gold Fields Limited (NYSE: GFI), explained why gold stocks have underperformed in recent years at the Melbourne Mining Club. He said...

  1. Miners have not met production promises: Among the world's eight largest gold miners, production is down 2% since 2006.
  2. Margins are up, but nowhere near the rise in gold prices: While the spot price of gold has increased about 20% annually over the past decade, miners have only expanded margins by 8%.
  3. Companies spend more to produce less: Capital expenditure on a per ounce basis has gone up 32% over the past 10 years.
  4. Management has failed to deliver: A lot of balance sheets at major gold firms have been under pressure because of gold hedges (i.e. selling future gold production at fixed prices), as well as overruns on projects.
  5. Dividends have to increase: Currently, gold stocks only average dividend yields of around 1.8%. Simply put, that's not enough for today's income-crazed environment.
  6. Investors are punishing the industry with re-ratings: The gold industry used to trade a significant premium to other sectors. Today, the gap has narrowed and investors have sold off their holdings due to the lower multiple ratings.

Holland also mentioned gold ETFs as part of the reason gold stocks have had limited upside in recent years. But all is not lost.

The Bright Side

On the other hand, here's what makes gold stocks a compelling investment opportunity for 2013.

  1. Demand for gold is rising: The World Gold Council expects gold demand will pick back up in 2013 after a sluggish 2012, thanks mainly to India and China.
  2. Gold production is projected to jump: Compound annual production growth is expected to hit 6% through 2017. For 2013, Goldcorp already pushed its production estimate up by 10%. As long as companies can follow through on their production promises, this will be a plus for gold stocks.
  3. Central banks are still printing money: From the United States to Europe to even Japan now, central banks are printing money to stimulate economic growth. And this is pushing other central banks, like China's, India's, Brazil's and Russia's, to boost their gold reserves in an attempt to hedge their downside risk.
  4. Supply is limited: According to Kinross Gold, all the gold produced in the history of the world would fit into two Olympic-sized swimming pools. In other words, this stuff doesn't grow on trees!
  5. Gold prices are expected to spike: Despite spot prices falling in recent months, most analysts expect gold prices to test new highs long before they ever hit triple digits.
  6. Gold stocks are a contrarian bet: Four out of the five gold companies mentioned in the chart above are down double-digit figures over the past two years. Any positive news could catapult share prices higher.

A Final Word

Chief Investment Strategist Alexander Green and Senior Analyst Steve McDonald both believe gold stocks will outperform gold prices in 2013. I agree. And adding a few of the best gold stocks to your portfolio today could prove very lucrative over the next 12 months and beyond.

Good Investing,

Mike

P.S. One of our favorite ways to play gold mining is through streaming, or royalty, companies. These businesses aren't exposed to the high costs of production and avoid the volatile swings in the market. Instead, they earn a reliable income stream on gold mined at their properties. For more about them and two of our favorite companies in the space, click here.

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