Gold-miner stock rally has just begun
San Francisco (Feb 21) Less than two months into the year, gold miners have recouped more than a third of what they lost last year, and the rally may still have a lot more room to run.
The NYSE Arca Gold Bugs Index has climbed roughly 25% year to date after dropping nearly 56% in 2013. The Philadelphia Gold and Silver Index has also gained around 23% this year, after a 49% loss last year.
Miners still have a long way to go to make up for the losses in recent years. The Gold Bugs index alone lost a total of 24% in 2012 and 2011, but it’s heavily outperforming the roughly 10% climb in gold-futures prices so far this year.
“The gold miners were deeply undervalued in 2013 and remained deeply undervalued,” said Malcolm Gissen, co-manager of the Encompass Fund +2.10% . “These are companies valued less than their cash and at 50% of [net asset value].”
Shares of the Encompass Fund, which has 59% of its net assets allocated in basic materials, have gained more than 18% in 2014 as of Thursday’s close and Morningstar ranks it as the top performer among natural-resources funds year to date.
Gissen said it’s a great time to invest in gold miners. There’s a jump in merger activities in the sector, as well as hostile takeover attempts, “which many say is a sign that higher gold prices are ahead,” he said.
Indeed, many big banks cut their 2014 gold-price forecasts in January, but the market’s view on the metal may be changing. UBS analysts recently raised their 2014 average gold price forecast to $1,300 an ounce from a previous forecast of $1,200, citing a “large investor-sentiment shift.”
Positive indicators
The fact that gold and silver miners are actually outperforming the metals is a good indicator too.
“In bull markets, investors want to see gold-mining stocks rally more than the metal,” said Ken Ford, founding partner at Warwick Valley Financial Advisors.
GoldCorp. Inc. shares, for example, have seen a year-to-date gain of about 28%. The Canadian gold producer said in January that it would offer to buy Osisko Mining Corp. for 2.6 billion Canadian dollars (US$2.45 billion).
“Gold miners have seen stellar performers recently for two reasons: all the bad news regarding reserve losses, write-downs and margin compressions have been factored in and gold itself has been rebounding,” said Brien Lundin, editor of Gold Newsletter.
“Gold and silver mining companies generally exaggerate the trends in the underlying metals themselves, both on the upside and the downside,” he said. This year, “they’re leveraging the move to the upside.”
Source: MarketWatch
