Are Gold And Gold Mining Stocks Undervalued?

 |  Includes: ABX, GDX, GDXJ, GG, GLD, NEM, NUGT
by: Sheldon Sutherland

If you've been invested in gold anytime in the past decade, then you're smart. If you haven't been invested in gold for the past decade, then you should be. Gold has been rising steadily for 11 years, and in my opinion is not subject to a reversal anytime soon.

The government has been rather reckless with our monetary policy and has created a feeling of uneasiness amongst the general public of where they should be keeping their hard earned dollars. The massive currency creation in forms of QE1, QE2, Operation Twist and QE3 have been slowly diluting the purchasing power of the dollar and transferring wealth to the holders of gold.

Here is a 13 year chart of Gold:Here is a 13 year chart of Gold

With that said, let's get on to the subject of this article.

Gold Mining Stocks and ETFs

Are gold mining stocks poised for huge gains in the near future, or are they going to continue down this long downward slope they've been on since mid 2011? It is true, gold mining stocks have severely underperformed the metal itself for the past decade, but that doesn't mean that the game is over for this sector; it very well could be (and in my opinion, is) the beginning of a multi-year bull market.

Let's take a look some of the massive sell-offs the gold mining sector has had recently. Here's a list of stock prices and their percentages losses relative to their 52 week highs.

Company Ticker Symbol Closing Price : 01/04/2013 52 Week
(GDX) 45.33 -22%
(GDXJ) 20.11 -35%
(NEM) 45.94 -29%
(ABX) 34.6 -32%
(GG) 35.75 -30%
(NUGT) 10.18 -37%
Click to enlarge
Click to enlarge

With (GLD) only 8% below it's 52 week high, I believe the miners deserve a 'strong buy' signal.

Do you remember that old saying "buy low and sell high"? I know it is nearly unheard of in today's market with average investors buying up overvalued stocks and praying for minuscule gains; but I assure you if a little patience is practiced, this "old-fashioned" style of investing still presents massive returns.

Here's a look at history:

The Great Depression

In the Great Depression there was a stampede into gold and gold mining stocks. For obvious reasons the public fled out of stocks that were based on consumer goods. The 1930s was a very deflationary period and with unemployment so high there was a massive drop in consumer spending. When consumer spending is at risk, so are the earnings of most companies. So when the Great Depression hit most of the general public fled out of all third-party risk investments and into hard assets. The only third-party investments that were making any true gains were the gold mining shares; just take a look at this chart of the Homestake Mining company compared to the Dow Jones Industrial Average (DJIA). This chart pretty much speaks for itself. Click to enlarge

Those wanting to have exposure to the gold market without holding physical bullion were pouring into the mining shares. Just look at the percentage gains during such a short time period. When's the last time you've experienced gains like these?







Gain %
Homestake Mining $65 $373 474%
Dome Mines $6 $39.50 558%
Click to enlarge

During the '30s the value of the actual gold bullion went through the roof, going from nearly 19 ounces to buy a share of the DOW to almost 2 ounces to buy a share of the DOW. Talk about a true wealth transfer. But wait, it gets better.

The Market Crash Of The 1970s:

During the market crash of the '70s, gold made gains through leaps and bounds as the rate of inflation was taking off due to the dollar cutting ties with gold in September of 1971. The price of mining stocks had risen significantly but it wasn't until gold's peak that the miners really took off. After gold topped $850 and began a sideways pattern, investors looked to the undervalued miners for more returns. Here is a look at the performance of the miners and junior miners of '70s market.

Company Name Price 12/29/1978 Price 1980 Peak Return
Campbell Lake Mines $28.25 $94.75 235.40%
Dome Mines $78.25 $154.00 96.80%
Hecla Mining $5.12 $53.00 935.20%
Homestake Mining $30.00 $107.50 258.30%
Newmont Mining $21.50 $60.62 182.00%
Dickinson Mines $6.88 $27.50 299.70%
Sigma Mines $36.00 $57.00 58.30%
Giant Yellowknife Mines $11.13 $39.00 250.40%
Click to enlarge

Junior Miners

Company Name Price 12/29/1978 Price 1980 Peak Return
Carolin Mines $3.10 $57.00 1738.70%
Mosquito Creek Gold $0.70 $7.50 971.40%
Northair Mines $3.00 $10.00 233.30%
Silver Standard $0.58 $2.51 332.80%
Lincoln Resources $0.78 $20.00 2464.10%
Lornex $15.00 $85.00 466.70%
Imperial Metals $0.36 $1.95 441.70%
Anglo-Bomarc Mines $1.80 $6.85 280.60%
Avino Mines 0.33 5.5 1566.70%
Copper Lake $0.08 $10.50 13025.00%
David Minerals $1.15 $21.00 1726.10%
Eagle River Mines $0.19 $6.80 3478.90%
Meston Lake Resources $0.80 $10.50 1212.50%
Silverado Mines $0.26 $10.63 3988.50%
Wharf Resources $0.33 $9.50 2778.80%
Click to enlarge

Here's a look at how the S&P Performed relative to Homestake Mining in the early stages of the bull market.

Is this time different?

I hear a lot of people asking, "It is different this time around?" My reply to that comment is, "No, it is not." In times of uncertainty we can always count on gold and gold mining stocks to rise, and this time around we are in a worse mess than we have ever been before! America is the largest debtor nation in the history of the world. The only thing that's different this time around is the sheer number of investors in today's market.

In the 1930s gold was at a fixed price of $20-$35 because it was still an asset that backed American currency. In the 1970s when Nixon took us off of the Gold Standard, currencies became free floating and the price gold had risen through inflation; but only North America and Western Europe could participate in the gold market and effect the worldwide spot price. In today's market the entire world has the ability to effect the spot price of gold and all currencies are tied to the dollar.

The dollar is headed for more debasement, and in a hurry. When Ben Bernanke announced a unlimited Bond buying plan in September of last year that was the straw that broke the camels back for the dollar. Ever since the creation of the Federal Reserve in 1913 there has been massive bubbles created and I believe the next bubble is going to be in gold, silver, and precious metals mining shares.

A chart of the DOW/GOLD ratio:

As you can see, gold is headed back to the 1:1 ratio with the Dow Jones.

Click to enlarge

Disclosure: I am long NUGT, SVM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.