gold-miner stock rally has just begun

Gold-miner stock rally has just begun

Less than two months into the year, gold miners have recouped more than a third of what they lost last year, and the rally may still have a lot more room to run.

The NYSE Arca Gold Bugs Index XX:HUI +0.25% has climbed roughly 25% year to date after dropping nearly 56% in 2013. The Philadelphia Gold and Silver Index XAU +3.92% has also gained around 23% this year, after a 49% loss last year.

Miners still have a long way to go to make up for the losses in recent years. The Gold Bugs index alone lost a total of 24% in 2012 and 2011, but it’s heavily outperforming the roughly 10% climb in gold-futures prices GCJ4 +0.45% so far this year.

“The gold miners were deeply undervalued in 2013 and remained deeply undervalued,” said Malcolm Gissen, co-manager of the Encompass Fund ENCPX +2.10% . “These are companies valued less than their cash and at 50% of [net asset value].”

Shares of the Encompass Fund, which has 59% of its net assets allocated in basic materials, have gained more than 18% in 2014 as of Thursday’s close and Morningstar ranks it as the top performer among natural-resources funds year to date.

Gissen said it’s a great time to invest in gold miners. There’s a jump in merger activities in the sector, as well as hostile takeover attempts, “which many say is a sign that higher gold prices are ahead,” he said.

Indeed, many big banks cut their 2014 gold-price forecasts in January, but the market’s view on the metal may be changing. UBS analysts recently raised their 2014 average gold price forecast to $1,300 an ounce from a previous forecast of $1,200, citing a “large investor-sentiment shift.”

Positive indicators

The fact that gold and silver miners are actually outperforming the metals is a good indicator too.

“In bull markets, investors want to see gold-mining stocks rally more than the metal,” said Ken Ford, founding partner at Warwick Valley Financial Advisors.

GoldCorp. Inc. GG +0.69% shares, for example, have seen a year-to-date gain of about 28%. The Canadian gold producer said in January that it would offer to buy Osisko Mining Corp. CA:OSK +3.22% for 2.6 billion Canadian dollars (US$2.45 billion).

“Gold miners have seen stellar performers recently for two reasons: all the bad news regarding reserve losses, write-downs and margin compressions have been factored in and gold itself has been rebounding,” said Brien Lundin, editor of Gold Newsletter.

“Gold and silver mining companies generally exaggerate the trends in the underlying metals themselves, both on the upside and the downside,” he said. This year, “they’re leveraging the move to the upside.”

But, according to Ford, the gold-mining exchange-traded funds are showing an “overbought reading” on a technical basis. “It might be wise for investors to wait for pullbacks in order to add any new money to the sector.”

Still, gold-mining indexes and ETFs have experienced three consecutive down years — in 2011, 2012 and 2013 — which is rare for any sector or industry, he said. “There is a good chance that gold is coming out of a multiyear bear market and will continue higher in the months ahead.”

The Market Vectors Gold Miners ETF GDX +0.23% has climbed 26% year to date, including nearly 14% this month to date. That compares to the gold-backed SPDR Gold Trust’s GLD -0.03% gain of around 10% year to date, including 6.3% this month.

Lundin said that from an investor’s point of view, the prospects for the miners are best based on their outlook for the metals.

“My view is that the dollar DXY +0.10% must depreciate against gold over the long term, as trillions of new dollars are being created while gold production is falling,” he said. “In the near term, the torrential flow of gold from West to East is draining western vaults and this seems assured to impact the gold price positively over the coming months.”

Given that, Lundin is bullish on gold and silver and “therefore, bullish on miners in general.”

Not all miners are riding the same tide. Shares of Newmont Mining Corp. NEM -2.49% are up 6% year to date, lagging the rise in gold prices. The S&P 500 component’s shares were falling Friday after Newmont reported a loss late Thursday.

http://www.marketwatch.com/story/gold-miners-stock-rally-has-just-begun-2014-02-21?pagenumber=2