Did you hear that ‘snap’ last week? It was the noise of most important stock indices finally breaking their supports. Around the world, markets have entered their downward acceleration. Most indices are quickly nearing in on their long term moving averages (at 200 days)… as we expected.
Investors didn’t take the recent standpoint of the Fed all that well. Bernanke wasn’t alluding to a next round of Quantitative Easing, the ‘Elixir of Life’ of the economic revival and the rise of stocks in general over the last few years. Now that the systemic problems are picking up steam again, the fear of a looming crash arises.
In reality, these kind of mood swings usually means ‘Sell’ on the market floors. As most traders are about to push their sell-buttons, no one cares for fundamentals anymore. Everything is just dumped en masse.
This is what we experienced in the recent smallish sell-off. Everything was thrown out, the most profitable trades of the recent months (banks, techs) ahead, but also less evident sectors, like gold mining stocks, were removed from the ports.
Gold prices have been steady hovering above $1,500/ounce. Still, the major gold stock indices, like the HUI of the AUX, lost more than ten percent. Due to the fierce pullback, gold stocks are now trading at the same level beginning 2008. With that difference, the price of gold was trading $900 per oz back then!
So the setback of gold stocks versus gold isn’t recent phenomena. The ratio has been lame for years now!
So why in god’s name are investors avoiding this asset class?
Because, in the end, fundamentals for gold companies have never been better: cash flows are going very strong, with profits exploding over the recent quarters! This, of course, doesn’t come as a surprise, with gold rising over 50% during the period.
We even looked at the rise of their input costs, but no dramatic increases whatsoever. Moreover, the price of oil was shooting up towards $150 a barrel back in those days, while today, oil is costing about 30 percent less!
Also external factors, like natural disasters, big accidents, failed acquisitions, fraud, … nothing major happened to shock investors. We even noticed that gold mining companies recently lifted their dividends to allure investors. But thus far brought little relief.
We fear that the major issue with gold stocks is still the negative stance of the investment crowd. The sentiment is reserved ever since the crash of 2008. This is starting to lead towards extreme low valuations, with market leaders like Newmont Mining and Barrick Gold trading at expected price-earnings ratios of 11x and barely 9x respectively!
This mismatch between gold en gold stocks won’t last much longer, and will have two potential outcomes: the price of gold is on the eve of a violent correction, or gold stocks are about to take off!
As the matrix for gold – a negative real interest rate in combination with sustained financial stress – hasn’t subdued, on the contrary, things are getting worse by the day, we are betting the farm on the second option. Prepare for fireworks in the gold stock arena in the coming months, as the price of gold will be creeping higher!