Tuesday, May 17, 2011
Gold stocks are cheap.
After the recent drubbing in the commodities markets, shares of the Market Vectors Gold Miners ETF (GDX) are down 10% on the year. Yet gold, by contrast, is still up 8%.
If we go back a little further in time, the gold stock underperformance is even more glaring.
In March 2008, gold hit $1,000 per ounce for the first time ever. It's now trading for $1,500 per ounce. Shares of GDX hit $55 per share in March 2008. Today, those shares are still trading for $55.
In other words, gold is up 50% in the past three years... while gold stocks are unchanged.
Like I said, gold stocks are cheap. Here's more evidence...
The above chart compares the performance of GDX – a basket of gold stocks – with the performance of gold. A low number indicates gold stocks are cheap relative to the metal. A high number means gold stocks are relatively expensive.
As you can see from the chart, gold stocks are the cheapest they've been in two years.
Look at the valuation of Newmont Mining (NEM), for example. NEM is one of the Big Kahunas of the gold sector. It has been around for 95 years. It's the largest gold mining company in North America. And anybody interested in the gold sector has to watch the action in NEM.
Yet the stock now trades at less than 12 times earnings. That's cheap for a gold stock. Heck, the S&P 500 is more expensive than that, trading at about 16 times earnings.
NEM even pays a 1.5% dividend on its shares.
Here's a big stock... in the most volatile sector... trading at a 30% discount to the valuation of the overall market... and paying a dividend greater than the yield on a three-year Treasury note. You don't often see such a compelling value in the precious metals sector.
Of course, cheap stocks can get even cheaper. You may not want to mortgage the farm and plow everything you have into the gold sector. But if you've been looking to get some exposure to the precious metals sector, now is the best time in two years to do so.
Best regards and good trading,
Last month, Brian Hunt told readers silver "could fall all the way down to $20 or $25 per ounce and still remain in the confines of its bull market." The precious metal dipped nearly 15% that day, its biggest correction in more than two and a half years.
Get Brian's advice, and learn how "the seasoned investor" will react, here: What the Crowd Is Missing About Silver.
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