There’s that classic Wall Street adage that goes, “Be greedy when others are fearful.” It’s one of the tenants of value investing. Basically, buy what’s on sale and what everyone doesn’t want.
And right now, no one wants gold stocks.
Many of the catalysts that propelled gold higher during the Great Recession have evaporated. The global economy seems to grinding forward and there simply isn’t any reason to own gold stocks. So it’s easy to see how gold has dropped to $1,085 per ounce during intraday trading — a five-year low.
But there could be value in gold stocks.
Many of the top miners have continued to reduce costs and are still profitable with gold at these levels. And yet, investors continue to shun them. Relative to the actual price of gold, gold miner stocks are cheaper than they’ve been in some 30 years. Meanwhile, as Bloomberg points out, miners are valued at an eight-year low relative to their assets and reserves in the ground. Several are now trading for less than book value.
With that in mind, now is the the time for real value hounds to consider gold stocks. Here are one stock, one exchange-traded fund (ETF) and one mutual fund to buy today.
Gold Stocks: Newmont Mining Corporation (NEM)
Newmont Mining’s (NEM) latest quarter showed why it’s one of the best gold stocks in the business. Even in this depressed environment, it’s managing to produce some hefty profits. For the latest quarter, NEM managed to see a 30% jump in earnings per share versus a year ago.
The key for Newmont has been its ability to reduce costs over the past few quarters. From fuel to labor, NEM has managed to dwindle its expenses. Today, NEM has an all-in sustaining cost of $909 per ounce of gold. That’s a decrease of 14.5% versus this time last year. As long as gold stays above that price, NEM will make money — and the larger the difference, the bigger Newmont’s profits will be.
NEM is getting an additional boost from its rising copper production. While copper prices have also tanked thanks to a rising dollar, the red metal is an opposite gold play. Copper prices usually do well during expansionary periods; in contrast, gold does well when the economy is hurting. With rising copper production and a 54% reduction in cash costs for copper, NEM is able ballast some of the gold issues.
NEM currently trades for a forward price-to-earnings ratio of 15.6. That’s pretty cheap for many gold stocks, let alone the broad market.
Gold Stocks: Sprott Gold Miners ETF (SGDM)
While the $6 billion Market Vectors Gold Miners ETF (GDX) maybe the most popular ETF to play gold stocks, it might not be the best choice. The Sprott Gold Miners ETF (SGDM) is a better way to bet broadly on gold stocks.
Like GDX, SGDM tracks miners of the precious metals. However, that’s where the similarities end. The new Sprott ETF is a smart-beta fund. That means it uses various processes to craft a better and market-beating index.
In this case, SGDM uses various screens to find gold miners with the highest “gold beta,” or sensitivity to gold’s price movements. The underlying Sprott Zacks Gold Miners Index adds other requirements that look at profitability, debt and revenue growth. This method creates a different and ultimately better gold ETF than some other funds carrying gold stocks.
Those factors — especially the profitability one — make the ETF a prime way to play the difficult gold environment. You’re getting all the good eggs while limiting exposure to the bad ones. Currently, SGDM holds just 25 miners vs. GDX’s 40.
Performance hasn’t exactly been great for the ETF. The higher exposure to “pure” gold stock has crimped its returns. However, if gold plods along, then SGDM’s screens should help it outperform its rivals over the longer term.
Expenses run just 0.57%, or $57 per $10,000 invested.
Gold Stocks: Tocqueville Gold (TGLDX)
When it comes to buying gold stocks, there are talking heads and then there are real experts. Fund manager John Hathaway is in the latter category. He has managed to help steer the Tocqueville Gold (TGLDX) mutual fund to sector-beating returns over his tenure as well as a four-star rating on Morningstar.
Hathaway predominately focuses on larger miners with good reserve positions and lower costs/expenses. That focus has helped on the return front as gold prices have evaporated. TGLDX has managed to fall less than the average previous metals mutual fund so far this year.
Additionally, TGLDX has plenty of exposure to the various gold royalty firms. These firms don’t actually do any of the physical mining, but they own stakes in the mines for a share of the profits, giving them some of the best cash flows in the industry.
Expenses for TGLDX run 1.38% and the minimum to invest is $1,000. However, that amount drops down to just $250 when funding an IRA.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.