Gold could end the year with its 12th consecutive annual gain, but its 2012 haul of 5.7% is the smallest since 2008. This year, the precious metal has underperformed stocks in the U.S., Europe, Japan, India, and Thailand; the Chilean, Colombian, and Mexican pesos; corn, cocoa, oats, soybeans, pork bellies, natural gas, Phoenix real estate, Monets, and Kandinskys, not to mention silver, platinum, and even lead. Bring me frankincense and myrrh, because all that glitters, lately, isn’t gold.
Gold’s struggle raises the question: Is it still a viable investment, and if so, what’s the best way to bet on it?
On paper, the case for gold is as solid as ever. Global central banks are printing money with gusto, governments are devaluing paper currencies, and the $100 bill has just overtaken the dollar bill as our most heavily printed note. In fact, it’s precisely because gold remains such an appealing store of wealth that throngs of investors—and speculators—can’t help flocking to it. As a result, gold increasingly trades less like a safe haven and more like a risky asset.
Jack Ablin, BMO Private Bank’s chief investment officer, thinks gold prices have grown out-of-whack with inflation expectations and other commodities. But a few things might support gold in the long run. “Commodities often become victims of their own success as high prices beget increased production,” Ablin says. “However, global gold production remains relatively flat even though gold prices have soared five-fold over the last 12 years.”
Central banks and Asian consumers also continue to hoard gold. Nearly 40% of the world’s supply is recycled, and the ability of owners to liquidate gold as prices surge bolsters supply and helps ease the buildup of price bubbles. Every piece of gold jewelry or coin ever made still has value, notes Nicholas Colas, ConvergEx Group’s chief market strategist. “Can you say the same thing about stocks or bonds?” he asks.
At $1,675.60 a troy ounce (nearest liquid futures contract), gold has come a long way since it sold for $18.92 in 1911. But in the short term, it helps that gold has corrected nearly 8% since early October and is 12.2% off its 2011 peak.
So where might gold bugs dig? Gold-mining stocks have lost nearly a fifth of their value since late 2011. Newmont Mining (ticker: NEM) trades at just nine times projected profits, well below its median of 24 times in the past decade. Its dividend yield has risen to 3.2% and return on capital is 13%, both decade highs. Price/earnings ratios for Goldcorp (GG) and Barrick Gold (ABX) are also at decade lows.
Miners’ operating expenses are a concern, but should stay contained if energy prices behave and as companies cut costs. Gold prices have soared as governments and investors lunge at physical gold, Ablin says: “For that reason, gold has climbed while comparative equities have lagged.”
The ratio of the NYSE Arca Gold Miners Index to gold prices has shrunk to about 0.7—the lowest in 12 years, and less than half its reading in 2006. Odds are good that gold stocks will start outperforming the metal, and are the safer way to bet on gold’s enduring shine. (Credits: Narrative – Kopin Tan for Barron’s Magazine).
The Master of Disaster