Tuesday, March 5, 2013

A Visual Look At Gold Mining Shares

The following excellent chart from James Turk shows the largest gold mining index, the XAU, priced in gold going back decades. It shows the relative over or undervaluation of the mining stocks relative to the commodity that they produce and sell. It would seem as if the price of gold rising or falling in general would provide a similar, stable change to the companies that mine it. What we have seen recently is the greatest divergence in history.

While physical gold has trended sideways for close to two years, the price of mining shares have completely collapsed relative to gold. This chart goes through March 1, and March 4 (yesterday) gold was essentially flat while most stocks were down at least another 3%. Just incredible.

When events like this occur you almost begin to wonder how much further gold stocks can fall relative to their basic fundamentals such as earnings? Many of the larger stocks pay a dividend, allowing investors to capture an income stream while they wait for stocks to recover.

How much longer can the irrationality in the market persist? The answer, of course, is much longer, but anyone who does not believe that gold will completely collapse in price (what the miners have priced in) have to take a long look at the chart above.