(Kitco News) - Gold stocks are generally undervalued compared to the price of gold, but there are numerous factors that will determine what the highs and lows are in 2012.
The poor state of the global economy had the starring role in gold stocks dismal performance, while rising debt and political unrest also played their own parts. The price of gold rose 10% in 2011, while the Amex Gold Bugs Index (NYSE: HUI), a basket of unhedged gold stocks, fell 16%. Gold stocks were down even compared to the broader stock market, as the S&P 500 stock index ended 2011 about flat.
“Gold stocks are dramatically undervalued,” said Jeff Clark, senior precious metals analyst at Casey Research. “When stocks of any nature are this cheap and this undervalued, sooner or later they revert to the mean, and simply reverting to the mean would imply that they’re going to catch up with gold.”
Some gold stocks saw significant drops, such as Agnico-Eagle Mines Ltd. (NYSE:AEM, TSX:AEM), which tested 52-week lows at $34.50 in late December after peaking at $76.46 in February 2011.
“We do believe that at some point they’re going to return to bring their leveraged performance that they had in the past,” Clark said. “The undervalued nature that they have right now simply can’t last.
Their valuations are low, their dividends are going higher, cash flow is going higher, profits are going higher so all these things bode well for gold stocks.”
Kenneth J. Gerbino, head of Kenneth J. Gerbino & Company, also said gold stocks are undervalued and tipped them to have a solid upcoming year.
“The money in the ground is worth a whole lot more than the money that’s being printed,” Gerbino said. “I would think that the gold mining stocks should have a decent year this year. If gold is anywhere above $1,300 this year, the mining stocks will probably be fine.”
Newmont Mining Corp. (NYSE:NEM) was one of the mining companies that did well last year, trading at $61.48, up from 52-week lows of $50.05 in March, but down from a 52-week high of $72.42 in November.
John Person, president of National Futures Investment Advisory, suggested that Market Vector’s Gold Miner’s ETF (NYSE: GDX) will finish 2012 lower than its close of $53.65 on Jan 9.
“I think that gold went as high as it did and miners went as high as they did based on uncertainty of leadership from U.S. fiscal policies,” Person said. “Some cycle work (technical chart analysis) that I have shows a market peak for the next two years. I’m not establishing any long positions at least up in here and I think by year’s end we’ll see the GDX lower.
“I don’t know if it’ll be a substantially lower price level but I think we will absolutely see it in the low to mid-$40 range.”
While Clark forecasts gold stocks to have a strong showing in 2012 due to them being undervalued, he also said that other factors will play into driving gold stocks higher.
Volatility in the markets could play a role in the coming year as Clark said that large sell offs and large climbs in both the price of gold and gold stocks will happen frequently. Clark said volatility will remain a present fixture in the markets throughout the year.
He also said that political risk will be a key component in the upcoming year which could negatively affect some gold stocks from companies in countries with high political tension.
For example, mine nationalization is a hot topic in gold-rich South Africa.
“Many governments around the world have increased taxes, royalties, regulations, fees on mining operations which is a direct result of high gold and silver prices and we think that trend is not going to stop yet,” Clark said. “As long as gold and silver prices stay high and continue to climb, we think political risk will be high.”
Shawn Hackett, president and chief executive officer of Hackett Financial Advisors doesn’t see gold stocks starting off the year with a bang but thinks they’ll have a stronger second half of the year.
“I think it’s going to be a yin and a yang this year,” Hackett said. “I think the outlook for stocks in the first year is dire which means gold stocks can’t possibly do well, but the second half of the year I think the stock market will do very well and, of course, gold stocks are in that environment.
“They can do a lot better considering how cheap they are relative to gold.”
While he suggested that gold stocks will have a better second half of the year, Hackett is not convinced that they will outperform gold prices as he attributed their performance with high inflationary times.
“We’re seeing deflation in housing, we’re seeing deflation in salaries, so there just isn’t widespread inflation which is why gold stocks are not going to do very well in that environment,” Hackett said. “Especially when we’re dealing with a sovereign debt situation that we haven’t really seen before, it’s pretty hard to suggest we’ll have an inflationary situation when debt is on the verge of having a major credit contraction. You’re just not going to get inflation in that environment until after the debt is written off.”
Hackett said that these are not highly inflationary times, compared to high inflation during the mid-1970s.
“We don’t have any long term inflationary expectations in the system like we did in the ‘70s when there was really widespread inflation across all asset classes, like housing, wages, just about everything was going up, we’re not seeing that today,” Hackett said.
Clark does not see inflation playing a role in the direction of gold stocks right away.
“When we get inflation those stocks will rise simply because of that factor which will probably be true for all stocks, not just gold stocks,” Clark said. “But we don’t think it’s inflation that’s going to cause any sort of mania in the gold stocks, that’ll be because gold prices will be getting into some kind of runaway mode and that’ll be a direct result.”
However, Gerbino said that inflation will play a major factor for gold stocks, especially in the Far East.
“I don’t think inflation should be a North American question, I think it should be an east-Asia and south-Asia question,” Gerbino said. “The money supply increases in India and China are far above the money supply increases in the U.S., the U.K. and Europe. I believe the inflation rates in these countries will have a positive impact on the gold price and of course inflation means more money put into the mining stocks.
“It has been very dormant, unusually so, probably being influenced by the deflation in asset values which is very different than deflation in consumer prices. But now with all that money floating around, consumer prices will start to go up and probably do so for the next three to five years.
“To me this is 1976 all over again where there was 5 years of uninterrupted and very high inflation rates, hitting their peak in 1981,” Gerbino said.
Source; http://www.kitco.com/reports/KitcoNews20120110AL_gold_stocks.html
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