Spot gold futures have lost nearly $60/ounce since last Wednesday. Federal Reserve chairman Ben Bernanke’s comment that the Fed believes inflation will remain “subdued.” If that’s the case, who needs a hedge against inflation.
Another part of the reason is reaction (or, perhaps, over-reaction) to last week’s drop in unemployment to 10%. If the economy is now recovering, there’s no need to put gold under the mattress.
With gold down about 5%, how are the miners doing? Large miners like Barrick Gold (ABX), Goldcorp (GG), Newmont Mining (NEM) and AngloGold Ashanti (AU) are down about the same amount in the same time period. Smaller miners, like Iamgold
(IAG) and Yamana (AUY) were down about 10% earlier this morning but have gained some of that back.
The SPDR Gold Shares ETF (GLD) is off about 3% in the past week, and the mining ETF Market Vectors Gold Miners (GDX) is off about 5%.
5 Reasons NOT to Invest in Gold
Yamana’s forward PE ratio is around 19, the same as Barrick and Newmont and somewhat less than AngloGold Ashanti at 22. For the past 12 months, Yamana shares have risen about 150%. Iamgold carries a forward PE ratio over 25, and its share price has risen nearly 350% in the past 12 months. Goldcorp’s forward PE tops the list at 36.
Perhaps the relatively rich forward PE ratios indicate that buyers expect more large central bank purchases, similar to India’s $285 billion buy from the IMF. And nothing the Fed can say will ever stop some people from believing that higher interest rates and rising inflation are just around the corner.
Yamana’s cost of production in the third quarter of 2009 was $349/ounce. Iamgold’s production costs during the same period were more than $100/ounce more, at $457/ounce, in the same ballpark as the larger miners.
Gold PE ratios are higher than the rest of the markets, which remains closer to 12 or 13. So in one sense, the companies might be overvalued. But this is gold after all, so the only thing that matters is whether or not investors believe high interest rates and inflation are on the march.
