Gold is at all time highs, but gold stocks aren’t doing much at all. What’s the story?
According to market experts, there are a number of reasons that Australian gold shares aren’t scaling the same heights as the gold price itself.
Some of these reasons are unique to our presence in a gold-producing country, some of the reasons stem from having very few – well, just one – large-sized gold miner, while other reasons might be providing us with a hint about the future direction of gold prices.
Evans & Partners senior research analyst Cathy Moises says gold stocks aren’t undervalued according to her analysis, but they haven’t exactly outshined other stocks either.
Moises said that apart from Newcrest Mining, Australia’s largest gold miner, most of the Australian market’s gold shares are currently trading at an appropriate valuation.
Moises said Newcrest traditionally trades at a much higher valuation because of its position as the only large, blue-chip gold miner on the local market. As a result institutional investors really have only one option if they want to own gold stocks.
Therefore, the large institutional investors are happy to pay a premium for exposure to the gold sector via Newcrest.
This is certainly different from the 1980s, when gold miners typically traded around 100% to 150% above their valuations.
High Aussie Dollar
While gold prices have surged in US dollar terms, that hasn’t been the case when gold is priced in Australian dollars. In fact, while the US dollar gold price rose from about US$850 at the start of 2009 to more than US$1400 currently, the Australian dollar gold price has gained less than 10% for the same period.
This is because the Australian dollar is closely tied to the gold price. As gold prices rise, so does the Australian dollar, and this causes local gold miners to miss out on some of the benefits of the higher gold price.
Moises agreed that the gains in the local currency have also hampered gold prices: “The higher Australian dollar have definitely had an impact, because the miners gains earn their revenues in Australian dollars.”
According to Moises, another reason for the lethargy in gold shares is because the market might not be convinced that gold will stay at these lofty levels.
The way investors traditionally value companies is by typically taking a very long-term view of their future earnings.
To use the lingo, a company’s share price is the current value of their future cashflows discounted over time to account for interest charges (which you would receive if you just put you money in the bank).
So, when looking at gold stocks, it’s up to investors to figure out whether high gold prices will stick around.
This is one reason why mining stocks are so volatile: no one knows how much they will be selling their wares for in six months’ time – let alone ten years!
“One could say that people are anticipating that this gold price won’t be around for ever,” Moises said.
Not all stocks are created equal
Australia is struggling for the kind of large-scale mining stocks that the big institutional money managers, such as the superannuation funds, can get a decent sized position in.
“The other major issue is that there have been quite a few takeovers in recent times. In the big cap space, apart from Newcrest Mining, there isn’t really much left in that space,” Moises said.
Of the many gold takeovers in recent years, Newcrest’s takeover of Lihir Gold was the most prominent.
With most stocks currently trading broadly around their valuations, Moises said the best opportunities would emerge from stocks with exploration potential.
Australian gold shares haven’t provided the bang for the buck that many investors would have hoped for as gold surges towards US$1500 per ounce.
So should investors think about alternative options for gold exposure? Investors can consider taking margined positions in the gold futures market, getting exposure through the locally-listed GOLD ETF, or even taking physical delivery.
While these options reduce the stock-specific risk of owning gold shares, investors still have exposure to currency risk, and even greater risk to the downside if holding margined positions
That said, there’s an old Australian sharemarket folklore that says the share price of Newcrest is a leading indicator of the gold price. If that is so, then gold might have its best gains now behind it.