Gold miners had a rough 2012, but 2013 looks to be a better one for the sector, which should make investor John Paulson happy. Last year, gold rose approximately 7.14% per U.S. dollar figures--its 12th straight year of increases. For gold and gold shares, they have historically had a positive correlation, but over the last few years, gold mining stocks have underperformed.
In a May investor letter, Paulson noted the following:
"Gold equities are now at historically low valuation levels. An analysis of the trailing 12-month EV/EBITDA ratio for the Gold shows that the gold equities are trading at their lowest valuation level in ten years, on par with the low point in valuation that prevailed following the failure of Lehman Brothers.
"Given the financial performance of the gold mining companies in the current gold price environment, we believe the equities are substantially undervalued and poised for a revaluation."
Since the beginning of the new year, two websites have forecast rising gold mining shares: Alpha Now and thelongshorttrader. We decided to take a look and this is what we found.
According to Alpha Now, current gold mining stock valuations sit at the low end of their historical range since 2004 or off 10% (basis XAU/spot bullion) since the SPDR Gold Trust (ETF) (NYSEARCA:GLD) had been introduced. Large rallies in gold mining shares have taken place over the last few years due to this compressed valuation base and additional factors will spur more this year.
Alpha Now cites these reasons:
- The leveling off of cost pressures will improve margins.
- With the number of CEO departures at gold mining companies, management will increase their accountability to shareholders. Well-managed companies will persevere from the pressures.
- A new high in gold prices will be reached; gold stocks will respond favorably after a lack of direction for prices. Gold could see a 15% rise in 2013.
- After gold shows it can reasonably trade higher than $2,000 an ounce (20% greater than current levels), gold mining stocks could then trade in the range of 13% to 15% of spot bullion prices (basis XAU). That equates to a 60% to 90% appreciation from the present 160 XAU level.
Thelongshorttrader has also jumped on the bandwagon and went so far as to include Paulson in their 2013 outlook.
On Jan. 7, the website wrote for its thesis:
- Paulson & co’s failed trades in the last few years have performed remarkably well in subsequent years. LST believes short Europe and/or long gold miners may present compelling reward vs. risk at some point in 2013 (if not now).
- Bet on Gold Miners including the majors and the juniors such as AngloGold Ashanti Limited (NYSE:AU), NovaGold Resources Inc. (NYSEAMEX:NG) and Gold Fields Limited (NYSE:GFI) (without loss of generality).
LST plans to conduct additional research for the thesis but it currently gives it three reasons to bet on gold miners:
- The smart macro money is short or looking to short gold, confidence appears to be rising as the Fed is giving some hope that QE and other “extraordinary” interventions will slow, if not start to reverse. The reflation trade in reverse…
- Inflation in labor, fuel, etc. would not be good for margins.
- “The risk premium goes up when the gold price goes up. Societies are more envious of your gold at $3000 than at $300. And there is no valuation argument that protects you against the risk of confiscation.” (Hugh Hendry)
There hasn't been an predictions from Paulson yet, but year-to-date, GLD is down 0.3% while February gold is trading at $1,667, up 0.43%.