Seeking Alpha
Investment advisor, portfolio strategy, macro, long/short equity
Profile| Send Message| ()  

On August 12, 2011, when most investors, traders and analysts were favoring selling stocks (with the S&P 500 index (SPY) down about 13% during the prior 3 weeks) and recommending buying gold, we wrote an article titled "Choosing between gold and stocks and deciding whether economy or inflation are key", whereby we made the case that from a very long term perspective, investors should be doing the opposite, buying stocks instead of gold. We supported our analysis by showing that a $100 investment in 1880 in stocks would have become about $7.7 Million by August 2011 inclusive of dividends reinvestment, while a $100 investment in gold would have appreciated to $9,200.


(Click to enlarge)

Source: usagold.com


(Click to enlarge)

Source: Yahoo Finance

Since then, gold prices reached an all-time high price of about $1,921 per ounce on September 6, 2011, and then reversed course and started heading lower. As of October 16, 2013, gold closed at $1,273.50 per ounce at the London afternoon gold price fixings. Hence, from its all time high price of $1,921 per ounce in September 2011, gold is currently down by about 50.8% while it is down by about 38.2% from its close of $1,760 per ounce at the time of our August 2011 article. Meanwhile, the S&P 500 index is up by 46.8%. Hence, $100,000 invested in the S&P500 index at the time of our article would be worth $146,800 today, while $100,000 invested in gold would be worth $50,844. In other words, an investor who had invested in stocks in August 2011 would have today almost triple the amount of money that an investor would have who had invested in gold.

Although from a very long term perspective our outlook remains the same, whereby we believe that stocks offer a better investment than gold, we do believe there are 'subset' opportunities whereby gold may actually shine and do well. In most cases, we believe such opportunities arise when most traders, analysts and investors are avoiding gold and providing extremely pessimistic views of the metal. For example, between the years 2001 and 2011, $100,000 invested in gold on January 1, 2001 would be worth about $464,736 on December 31, 2011, while $100,000 invested in the stock market would be worth about $117,000 (with dividend reinvestment). Hence, during such period, an investor who had invested in gold would have on December 31, 2011 almost quadruple the amount of money that an investor would have who had invested in stocks.

Gold prices between 2001 and 2011


(Click to enlarge)

Source: www.igolder.com

S&P 500 Index between 2001 and 2011


(Click to enlarge)

Source: Yahoo Finance

Recently, there has been endless articles about how gold prices still have more room to the downside, as reported by Bloomberg on September 11, 2013 that Goldman Sachs, Societe Generale, Citigroup, ABN Amro and Macquarie are expecting lower prices:

"Gold prices will decline into 2014 on the back of an acceleration in U.S. activity and a less accommodative monetary-policy stance," the analysts wrote. "The September FOMC meeting, where our economists expect a tapering of QE3, could prove the catalyst to push gold prices lower."

Societe Generale SA, Citigroup Inc., ABN Amro Group NV and Macquarie Group Ltd. are among banks predicting lower prices in 2014 as the global economy recovers and inflation fails to accelerate.

Many such analysts can be proven wrong during the next few months and may have to play catch-up chasing higher gold prices. There are several factors that could lead to higher gold prices:

  1. Although the U.S. government shutdown standoff seems to have been resolved, the deadline for the debt limit ceiling has merely been pushed forward while the government will now be funded through mid January 2014. As a result, we expect Washington related uncertainty to linger for a few more months. Such uncertainty will most likely provide support to gold prices
  2. Gold prices have already priced in an easing of geopolitical risks in the Middle East due to the resolution reached with Russia on Syria, as well as the recent engagement in direct talks between Iran and the U.S. Hence, at the current time a re-escalation of tensions in the Middle East or elsewhere would likely give a boost to gold prices
  3. The Federal Reserve has already surprised analysts by postponing any current plans for tapering as they are not convinced the current economic environment is strong enough. Continued accommodative policy will likely support gold prices, while the downside risk to gold prices from Fed tapering has already been incorporated into the market
  4. Gold prices are currently down by over 50% from their 2011 highs and a temporary partial retracement of such losses is highly possible. During the past two months, both the 50-day and 100-day moving averages have been breached to the upside for the SPDR Gold Share fund (GLD), and although the current price is below such averages, the current downtrend momentum has been halted.

SPDR Gold Shares


(Click to enlarge)

Source: Yahoo Finance

Given the above factors, we believe at least for the next several months, most analysts could be wrong again and gold prices could offer a good value at current levels. To such effect, we would recommend buying SPDR Gold Shares fund , as well as Barrick Gold Corporation (ABX), Newmont Mining Corporation (NEM), and Eldorado Gold Corp (EGO). Alternatively, investors can also buy gold mutual funds such as First Eagle Gold (SGGDX) and Van Eck International Investors Gold C fund (GCX).

SPDR Gold Shares fund is currently down 21.68% year-to-date from $162.02 on December 31, 2012 to $126.9 on October 16, 2013. It is the largest physically backed gold exchange traded fund (ETF) in the world with $36.25 billion in total gold in trust.

Barrick Gold Corporation


(Click to enlarge)

Source: Yahoo Finance

Barrick Gold currently has a market capitalization of about $17.64 billion, with its share price currently down 49.61% year-to-date from $35.01 on December 31, 2012 to $17.64 on October 16, 2013. With average analysts' earnings estimates of $2.64 per share for the year ending December 2013 and $2.29 for the year ending December 2014, Barrick boasts respective price/earnings ratios of 6.68 and 7.7. Given our outlook for gold prices in the near term, Barrick's stock substantial drop year-to-date as well as Barrick's attractive price/earning ratio, we believe shares offer attractive value.

Newmont Mining Corporation


(Click to enlarge)

Source: Yahoo Finance

Newmont Mining currently has a market capitalization of about $12.88 billion, with its share price currently down 44.27% year-to-date from $46.44 on December 31, 2012 to $25.88 on October 16, 2013. With average analysts' earnings estimates of $1.91 per share for the year ending December 2013 and $1.66 for the year ending December 2014, Newmont boasts respective price/earnings ratios of 13.55 and 15.59. Newmont mining price/earning ratio is not as attractive as Barrick's , however given our outlook for gold prices in the next several months, as well as Newmont's stock price depreciation of over 44% year-to-date, we believe shares offer a good value at these levels.

Eldorado Gold Corp


(Click to enlarge)

Source: Yahoo Finance

Eldorado Gold currently has a market capitalization of about $4.17 billion, with its share price currently down 56.06% year-to-date from $12.88 on December 31, 2012 to $5.66 on October 16, 2013. With average analysts' earnings estimates of $.34 per share for the year ending December 2013 and $.34 for the year ending December 2014, Eldorado boasts respective price/earnings ratios of 16.65 and 16.65.

Eldorado currently has an average 3-year revenue growth rate of 47.4% vs. industry average of about 19.7%. Despite Eldorado's elevated price/earnings ratio, given its above average growth rate, as well as its relatively small market capitalization, we believe an appreciation in gold prices will provide further boost to Eldorado's shares. With shares currently down 56.06% year-to-date, investors may find current levels an attractive entry point.

Conclusion

Although from a very long term perspective we believe that investing in stocks is a better investment than investing in gold, the current environment and the substantial drop we have experienced in gold prices since late 2011 may offer a good entry point to benefit from a potential bounce in gold prices during the next few months. To such effect, investors who share our outlook can either buy the SPDR Gold Shares ETF or we would also recommend Barrick Gold, Newmont Mining and Eldorado Gold. On the other hand investors may also buy the gold mutual funds Van Eck International Investors Gold C and First Eagle Gold.

Source: Wrong About Gold Again?