What's Better: Gold, Gold Stocks or Gold Miners?

|
 |  Includes: ABX, AEM, AKG, ANV, AU, AUQ, AUY, BVN, CDYCF, CGC-OLD, CGR, DRD, EGI, EGO, GBG, GDRZF, GFI, GG, GSS, HL, HMY, IAG, JAGGF, KBXRF, KGC, NG, NSU, RBY, RGLD, RIC, SA, THM, TRX, UXG, VGZ, XPL, XRA
by: John Henderson

What’s better to own, the commodity gold, or equities with gold mining exposure? I noticed that Wednesday’s trading had some gold stocks that were perking up. I remember back in 1989 when I first ran across gold and the Canadian miner Echo Bay Mines (ECO). I think the stock was around 15 at the time, traded on the AMEX, and gold the commodity was around $400 per ounce. I distinctly remember ECO would go in lock step with the commodity. What was interesting is that many gold stocks back then were very speculative as many did not have revenues or earnings.

Gold stocks lag

From 1989 to 2002 gold did nothing. But from around 2002 to 2009 it has been on an amazing run, going from about $300 to $1,200. But what have gold stocks done during that time? If they have underperformed perhaps there might be room for catch up? As I began to dig into the gold stocks, my gut told me that the gold stocks have lagged. I remember the common thinking over the years about gold – if a gold miner could maintain its costs reasonably well, and if the price moved higher even only incrementally, the earnings power of a gold miner would soar. If that happened, the stock price would also follow.

Following that logic, I decided to look at the 3 year period ending March 3rd 2010. I would compare gold to gold stocks. For gold, I would use the ETF, GLD as the gold price barometer and then compare that to the performance of gold stocks. On March 3rd 2007, GLD was at $72.28 (each ETF unit equals 1/10th of an ounce of gold, putting gold at about $723 / ounce).

How about gold stocks during that period, how did they perform? To find out, I used Yahoo screener screening for gold stocks. I then pared down the list for stocks that were priced above $1 per share. There are a total of 40 stocks whose total market caps = $190 billion. The average stock returned 36%, underperforming the 55% return of GLD.

Interesting to look at two of the top two share performers, Exeter Resources (NYSEMKT:XRA) and Rubicon Minerals (NYSEMKT:RBY). These two returned well over 200% over the three years but have no trailing twelve month revenues. Gold stocks tend to move more on potential than actual revenues and earnings. What’s also interesting to note is only 13 stocks outperformed GLD and 24 underperformed GLD. Three did not have share prices three years ago to compare so they were dropped to the bottom of the list. Twenty of the stocks had a trailing PE, even with the 55% spike in the GLD. Twenty five of the stocks had trailing revenues. This seems to show that gold mining is still a very tough business. One last interesting nugget of information is that most of the miners were from Canada.

The list is below. Please note that I ranked the stocks on the list from best performers to worst performers and also categorized a stock as an outperformer if it gained more than the 55% that GLD gained over those 3 years. Will gold miners catch up to the GLD or even exceeed the return of the GLD? That is for the investor/speculator to figure out but there definitely seems to be a performance disparity:

Symbol Price Price % ch Performance Market Cap Revs Rev PE
3/3/2007 3/3/2010 vs GLD ($ Billions) (TTM $B) Growth %
GLD 72.28 112.11 55.11 - - - - -
XRA 1.78 8.65 385.96 outperformed 0.546 - - -
RBY 1.31 4.61 251.91 outperformed 0.978 - - -
BVN 12.98 34.17 163.25 outperformed 8.6 0.786 11 23
EGO 5.62 13.34 137.37 outperformed 5.34 0.279 22 30
CGC-OLD 1.68 3.53 110.12 outperformed 0.171 0.045 28 15
IAG 7.67 15.64 103.91 outperformed 5.76 0.914 27 49
EGI 1.44 2.79 93.75 outperformed 0.267 - - -
JAG 5.44 10.37 90.63 outperformed 0.824 0.129 36 42
RIC 2.39 4.14 73.22 outperformed 0.108 0.073 16 48
AEM 36.38 61.35 68.64 outperformed 9.61 0.614 208 112
GG 24.86 40.34 62.27 outperformed 29.56 2.55 25 26
SA 14.62 22.98 57.18 outperformed 0.864 - - 91
RGLD 30.38 47.41 56.06 outperformed 2 0.104 138 66
KGC 12.79 19.24 50.43 underperformed 13.39 2.41 44 43
ABX 27.6 40.38 46.30 underperformed 39.75 8.14 12 -
NSU 1.9 2.52 32.63 underperformed 0.353 - - -
AZK 3.4 4.34 27.65 underperformed 0.69 0.161 24 31
NEM 41.95 52.37 24.84 underperformed 25.67 6.59 50 33
NAK 9.96 9.92 -0.40 underperformed 0.923 - - -
GSS 3.68 3.37 -8.42 underperformed 0.867 0.401 69 48
AU 41.66 38.03 -8.71 underperformed 13.92 4 8 -
DROOY 7.1 6.47 -8.87 underperformed 0.246 0.247 5 67
NXG 3.32 2.91 -12.35 underperformed 0.845 511 21 20
GBG 2.01 1.75 -12.94 underperformed 0.582 0.048 - -
AUY 13.52 11.17 -17.38 underperformed 8.18 0.978 50 24
TRE 5.19 4.21 -18.88 underperformed 0.384 - - -
GFI 15.99 12.31 -23.01 underperformed 8.68 4.13 14 19
HMY 13.31 10 -24.87 underperformed 4.26 1.21 -6 50
KBX 1.62 1.12 -30.86 underperformed 0.07 - - -
CDY 1.93 1.33 -31.09 underperformed 0.078 - - -
CGR 1.53 1.04 -32.03 underperformed 0.116 0.044 16 -
GRS 16 10.17 -36.44 underperformed 1.39 0.187 -1 63
UXG 4.52 2.81 -37.83 underperformed 0.343 - -
XPL 3.65 2.12 -41.92 underperformed 0.063 - - -
NG 16.3 6.07 -62.76 underperformed 1.14 0.001 -54 -
VGZ 7.54 2.15 -71.49 underperformed 0.96 - - -
GRZ 4.2 1.11 -73.57 underperformed 0.65 - - -
ANV - 14.78 - - 1.09 0.27 - -
THM - 6.93 - - 0.415 - - -
KGN - 5.95 - - 0.266 - - -
average return = 36.15 total market cap = 189.949
Click to enlarge

Authored by Tom Henderson, Strategist JBH Capital.

Disclosure: No disclosures.