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.

Gold stocks

There are a number of reasons for gold stocks to outperform many of the market indices (except US Treasuries) in 2010 including US, world, emerging market equities, commodities, dollar, US corporate bonds, etc. Amidst the global market uncertainty and volatility, gold is viewed as a store of value (or "wealth insurance" as termed by Peter Hambro, owner of a Russian gold miner), diversification tool, inflation hedge, dollar hedge, etc. Investment demand makes up about 26% of the demand for gold (a rising share) while reduction of Central Bank gold sales this year has also been more supportive of price.  Furthermore, very low real interest rate is supportive of rising gold prices.

One way to get exposure is through ETFs (GLD for gold and GDX for gold stocks). GDX is a basket of gold companies so will be subject to equity market risk. Below is a table to show where some of the major gold companies' enterprise value are trading relative to their reserves and resources ($/oz), a useful gauge of their relative valuation.  The companies are ranked by the highest (most expensive) to the lowest (least expensive).