Gold shares, cheapest since 2002, said to be 'coiled spring' for rally


By Thomas Biesheuvel
Bloomberg News
Tuesday, November 29, 2011

Gold mining stocks are trading at their cheapest level in at least nine years even as the industry's profits are estimated to almost double this year and bullion trades close to its historic high.

The benchmark NYSE Arca Gold BUGS Index (HUI) that includes Barrick Gold Corp., Newmont Mining Corp., and AngloGold Ashanti Ltd. ended last week at 17 times earnings, the lowest since at least November 2002 and below a five-year average of 37 times.

Investors sold equities across the board as Europe's debt crisis soured the corporate profit outlook, and they're ignoring analyst projections for bullion and gold producers. The gold index's 16 members will increase combined per-share earnings 94 percent this year, according to estimates compiled by Bloomberg.

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"When you look back in history, you will say this was a buying opportunity," said John Wong, a portfolio manager at CQS Group's New City Investment Managers in London and lead manager of the $200 million Golden Prospect Precious Metals Ltd., a fund holding gold and silver stocks. "It's like a coiled spring."

Gold equities have fallen 5.6 percent this year, heading for the first annual decline since 2008. Gold reached a record $1,921.15 on Sept. 6 and is set for an 11th annual gain.

"The market doesn't trust big spikes," said Jon Bergtheil, an analyst at Citigroup. "People will wait to see if gold holds above $1,600 for a while."

Gold averaged about $1,706 an ounce in the third quarter, 39 percent more than a year earlier, and is forecast to average $1,859 next year, according to the median estimate of 18 analysts compiled by Bloomberg. It closed Nov. 28 at $1,712.

Hedge fund manager David Einhorn said Nov. 1 that a "substantial disconnect has developed between the price of gold and the mining companies." Einhorn's Greenlight Capital Re cut holdings of the commodity in the third quarter and moved funds into the Market Vectors Gold Miners ETF, which tries to replicate the Arca Gold Miners Index (GDM) of metal producers.

Gold miners' earnings per share and per-share cash flow reached the highest levels in at least nine years during the third quarter, according to data compiled by Bloomberg.

"When earnings are reported, the market will be all goggle-eyed about how much cash is flowing in to these companies and what their balance sheets look like," said Bergtheil. "You tend to get a response at that time."

Gold equities have been dragged down as investors seek a haven from market turmoil stoked by the sovereign debt crisis. The MSCI All-Country World Index has fallen 12 percent this year while the Stoxx Europe 600 Index has sunk 16 percent.

Barrick Gold, the world's biggest producer, has slipped 6.8 percent in 2011, even after posting record earnings in the third quarter. AngloGold Ashanti, Africa's biggest supplier, has slipped 10 percent, while Newmont Mining has advanced 6.2 percent. None of the members of the Gold BUGS Index have outperformed the metal this year.

Investors have been increasing holdings in exchange-traded products physically backed by gold to bet on gains in prices for the precious metal, without accepting the potential negatives that come with holding company shares.

"Investors are voting with their feet," said Ian Preston, a resources analyst with Goldman Sachs Australia Pty in Melbourne. "They can get all of the leverage they want out of going straight into an ETF without any of the operational risk, or political risks, or general risks associated with equities."

Holdings in gold ETFs on Nov. 23 reached a record 2,350.8 metric tons, valued at $127.6 billion, according to data compiled by Bloomberg. Hedge funds and other speculators increased their net-long position, or bets on higher prices, for four weeks, the longest stretch since March, Commodity Futures Trading Commission data show.

"Gold equities will come back," Norm Pitcher, chief operating officer of Vancouver-based Eldorado Gold Corp., said in an interview yesterday. "The one thing you don't have when you are buying an ETF is any upside to exploration, and I think the companies that have good exploration assets are the ones that will probably be valued a little higher."

That attraction of ETFs over stocks may also fade when concerns ease that the European debt crisis will ravage corporate profits, said New City's Wong.

"Gold mining shares are still equities, so they are determined by the equity market as a whole, not just gold," said Wong. "The performance of equities in a bear market is bad. Once there is some stability and people are prepared to take risks, I see that there will be a massive move."

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