Gold Stock Valuations Implode as Gold Rises to Two-Decade High Against Equities

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7Aug/110

Gold Stock Valuations Implode as Gold Rises to Two-Decade High Against Equities

DENVER (MineFund.com) -- The last time that general equities were this cheap relative to gold or silver was 1991 and 1987 respectively. Unfortunately, it’s not merely confined to general equities.

Precious metal miners have also plunged to very low valuation levels in recent weeks as they have treaded water even whilst metals prices have been on a tear, and money has been sluicing into exchange traded funds at an unprecedented rate. A basket of senior gold stocks has seen intraday multiples crash to ranges we last saw in the aftermath of the Lehman bankruptcy.

This past Thursday, aggregate data for the world’s thirteen senior gold producers showed them worth just $0.73 for every $1 of the gold price. The last time gold stocks were that cheap was November 2008, shortly after the all-time low of $0.66 set on 27 October 2008.

By contrast, the amount of money invested in exchange traded gold has soared to levels last seen at the all-time peak last July. Gold ETFs are worth around $1.16 for each $1 in the gold price; a complete reversal of assumptions about leverage to the gold price. There has never been such a wide disparity between gold stocks and ETFS with the latter now far outpacing the equities.

MineFund’s data shows a new all-time high of 60 million ounces resting in open-end funds; 3.5Moz recorded in closed end funds; 0.5Moz in personal gold inventories; and 10Moz in vaulted gold.

At the same time, there has also been a dramatic change in trading patterns into gold ETFS since late last year. There was previously a very metronomic pattern of selling that coincided with the start of every month.

That pattern has been obliterated for reasons that are not yet obvious although we suspect it is mostly due to European money flow as the EU has failed to stem its accelerating and deepening crisis.

Although that suggests there is excellent value to be had by buying more equity in gold producers there is still reason for caution. The chart pattern for the deteriorating valuations is very similar to the Summer of 2008 when it seemed impossible for prices to go any lower. However, they continued to do so, and only stabilized from April 2007.

If the average valuations seen recently hold or get worse, then this August could set a new record monthly average low. The previous Gold Equity Leverage Index lows were 0.77 set in two consecutive months - October and November 2008.

Friday’s Standard & Poor’s downgrade of America’s credit rating makes it fairly certain that bargains will be on offer during Monday’s trading, and probably for some time to come. But hard assets are coming into their own in a way we haven’t seen since the Great Depression, and they will continue to appreciate for as long as financial asset alternatives remain unconvincing. Don’t wait too long.