One of the more frustrating things about being a gold bull in recent months has been the consistent underperformance of the stocks.
The ratio of gold stocks to the price of gold has dropped to multiyear lows. The only time it was lower was the financial crisis of 2008. In addition, by many conventional methods, gold stocks are cheap. For example, the average price-to-earnings ratio of gold stocks is about 15 at the moment, which is about half of its regular historical average.
The HUI gold bugs index is trading at 477, which is about 6 percent lower than it was at its 2008 high. What is remarkable about that is that gold is about 65 percent higher than its 2008 high. Therefore, there has been a lot of valuation contraction in the gold stocks and they are now very cheap.
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For whatever reason, investors are shunning many of these stocks and just focusing on the negative.
Many of these companies have reported very strong earnings in recent months and have failed to respond. However, when a precious-metals company has reported some bad news, the stock reacts negatively in a large fashion. It’s difficult to decipher.
At some point though, we need a reversion to the mean. You cannot keep having gold-prices rise and the gold stocks lag. Therefore, now it is a great time to get in.
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A nice analogy is what happened to Apple a few years back. Apple has experienced explosive growth for years. However, if you look at its performance in 2010 into mid 2011, it was underperforming its growth.
Therefore, the valuation was contracting. You know that it was just a matter of time before Apple took off and caught up with its growth. We have seen this with the stock zooming higher in late 2011 into 2012.
I expect something similar is going to happen to the gold stocks sooner rather than later. And you will want to be positioned on the long side for when this happens.
About the Author: David Skarica David Skarica is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes the Gold Stock Adviser. Discover more by Clicking Here Now.
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