February 11, 2003
Gold Stocks More Expensive Than Tech

P/E Industry (SIC Codes) 83.1 Gold & Silver 43.4 Office Equipment 43.2 Semiconductors 42.9 Forestry & Wood Products 42.9 Schools 42.1 Misc. Transportation 39.7 Broadcasting & Cable TV 39.2 Motion Pictures 38.8 Communications Equip 38.6 Airline Lowest Average P/E 7.4 Tobacco

The average P/E ratio on all gold/silver stocks is higher than the average P/E of any other industry. In fact, the average gold/silver multiple is nearly double the average multiple in semiconductor stocks.

Yes, the stats to the left are flawed: they do not take into account gold’s recent surge (which is sure to increase producer earnings) and companies with triple digit multiples (ABX, AEM) skew the average. Nevertheless, that gold/silver stocks have the highest average multiples comments on the speculative strength in gold shares. By contrast, Tobacco stocks, which no one seems to be speculating in these days, have the lowest average multiple of any industry.

To begin with, I receive quite a bit of email concerning gold. Many members are curious why no gold stocks remain on the Wish List and/or why any investor would want to miss out on what is surely to be a prolonged run in gold (stocks). To reiterate previous sentiments: Todd and I like the metal as a hedge against U.S. dollar erosion, but do not believe any gold stocks are attractive.  This is not to say gold stocks will not rally by spectacular amounts if (more likely when) gold surpasses $400 an ounce. Rather, only that gold stocks could also fall by spectacular amounts if (when) the gold rally fizzles. 

Are Gold Stocks Under or Overvalued?

If you use last years peak in gold stocks as a magical ‘fair value’ point, the premise that gold stocks are seriously undervalued can be unearthed. A lot of people are selling this idea, but I don’t buy it.

“Any intelligent observer of this market is aware that on average gold stocks were higher in the spring of 2002 when the price of gold was around 315 dollars an ounce.  And now the price of gold is 17% higher & the junior gold sector is still under valued when compared to prices a year ago when gold was considerably lower.”  GoldSeek

An intelligent observer of the gold market is aware of one thing: investors are paying more for the privilege of owning gold shares today than they did before jumped above $300 an ounce. To be sure, the premiums in gold stocks have risen faster than the underlying earnings.  As such, comparing last year’s peak in the XAU or HUI to the price of gold and using this comparison as a means to expose undervaluation is nonsensical. In fact, last years ‘peaks’ are a better guide for speculating about overvaluation.

Since going hedge free Meridian’s realized selling price has risen. However, earnings have not mirrored the 19% jump in gold (from 2Q01-3Q02).  Rather, over the last 3 years MDG’s adjusted EPS have been 43 (last 4 quarters), 40, and 41 cents respectively.  Moreover, over the last 3 years the company has produced 556,403 (last 4 quarters), 429,100, and 456,297 ounces respectively (even as more gold is produced and a higher POG is registered, earnings have barely risen).  The point former Wish List stock, Meridian, demonstrates is that a rally in the POG does is not always statistically mirrored in producer performance. 

In sum, those investors that choose to ignore producer operations/valuations in favor of ‘gold to the moon’ speculations are the same type of investors that purchased internet stocks.  ‘If’ gold rallies…’if’ gold declines’…Forget about the ‘ifs’ -- gold stocks are expensive!

BWillett@fallstreet.com

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