How Long Can Gold Stocks Stay This Cheap?

Gold stocks qualifying as deep value or contrarian investments may sound a very strange thing to say. However, given that earnings of gold stocks are at record highs and valuations are not too far from the lows of the last 15 years how can they not be "deep value" contrarian trades.

Below is the Price to Book ratio of Newmont (I am using Newmont as a proxy for the gold mining sector) and its EPS from the mid 1990s until now. Granted there is a lot more to valuing a stock than just the EPS and Price to Book ratio. However, to me, for a sector, to offer deep value you should not have to get too cleaver about valuations. Deep value should be obvious to even a high school student!

It seems that the crowd does not believe that the earnings of gold stocks will be sustainable, that the big rise in gold is merely a "flash in the pan". This would have to be one of the strangest times I have lived through as a professional trader. To me the TMT "bubble" of the late 1990s was weird. Back then the crowd was so optimistic that it did not care to pay 100x earnings (if indeed there were any) for an "IT" stock because (I guess) earnings and cashflows would eventually come in a big way.

After all it was the "new economy"! Now it appears to be completely the opposite mentality. The earnings and cashflows are there, in fact earnings are at record highs. But the crowd, being as pessimistic as it is, believes that earnings will come crashing down (as they would if you were going into another depression). Yes the mental state of the crowd is a very strange thing!

John Templeton once said: "bull markets are born in pessimism, grow in skepticism, mature in optimism, and die in Euphoria. The bull markets of the 1990s died in the Euphoria of the TMT bubble. Perhaps the bull market of the next 10 years grew out of the pessimism and the perception that corporate earnings were not "real" and only a creation of central banks.......gold stocks are case in point!

I think that long term investors should note be shy in buying into large cap gold stocks like Newmont Mining (NEM) and Yamana Gold (AUY). We have a 10% exposure to gold stocks in our Global Macro Portfolio.

About the Author:
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Article Originally Published On: http://www.articlesnatch.com

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