Gold stocks and gold updated

Another year of sovereign debt uncertainty in Europe/US and dollar debasement has led to gold price soaring by 33% year-to-date to today, and the gold ETF (GLD) tonnage increasing to 1290.76 tonnes or about 41.5 million ounces (equivalent to 48% of gold produced in 2010).  While gold price is surging, gold stock index (ETF: GDX) is sorely lacking behind.  While GLD (orange line) has doubled since July 2, 2009, GDX (green line) has gone up by "only" 61%, as these gold stocks are inherently more correlated with general stock market performance and are also impacted by rising operating costs and country risk.  If gold price stays at this kind of higher level, and the broader market stabilizes, gold stocks should do very well.

(Click to enlarge, source: Bloomberg)

I have updated my previous gold stock evaluation piece.  Here I rank the gold stocks by Enterprise value/gold reserves from the highest (most expensive) to the lowest (least expensive).

Among the larger gold miners, my own value screen likes Gold Fields, Anglogold Ashanti, Barrick, Newmont (representing one-third of the GDX ETF).  The emerging market gold miners (especially those in Russia and Central Asia) continue to trade very cheap e.g. Centerra Gold, High River Gold and Petropavlovsk.  Execution ability of management is a prized object.

How many shopping baskets do 100 Euros cost around the world?

Every four months, the global team at ING look at the relative prices of a basket of goods all around the globe - their measure of Purchasing Power Parity (PPP).  The shopping basket consists of 25 products or services including food, non-food consumables, energy and services.  Looking at how many shopping baskets 100 Euros can buy will give us a sense of which local currencies are cheap or expensive.

Using this measure, emerging market (EM) currencies such as Mexican Peso, Indian Rupee, Chinese Renminbi and Polish Zloty look cheap while Brazilian Real and Turkish Lira look expensive.  In addition, Chinese Renminbi is subject to appreciation pressure because of its positive current account plus foreign direct investment balance while Turkish Lira looks even more vulnerable with a negative current account and foreign direct investment balance.

ING also calculated that while in early 2004,  the 100 Euros would buy on average 40% more shopping baskets in EM countries than in the U.S.; currently that difference has shrunk to 20%, indicating the strengthening economies and currencies of EM countries versus the depreciating dollar during this time.

Going forward I still like holding a basket of emerging market currencies versus the USD, especially countries with positive current account fundamentals with rising interest rate trend.