It is undeniable. We are living in the age of gold-mania...
History repeats itself. It was the tulip-mania in the 18th century. Stock-mania in the late 1920s. Gold-mania in early 1980s. Techno-mania in late 1990s. Now, we are back to gold-mania. It is indisputable that the price of gold has gone to insanely high levels in the last decade:
(Click chart to enlarge)
Those who are still bullish claim that gold is a reliable store of value. They were once right. It was a reliable store of value during the gold-standard period. However, gold became a piece of paper, just like a share, traded in the stock market. SPDR Gold Trust (GLD) has a market value of $55.4 billion. Other than limited industrial use, gold has no productivity. Warren Buffett, the investment guru who was largely ignored during the techno-mania period thinks the same. Buffett believes that it is a piece of nothing with no productivity, and no intrinsic value:
Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.
Recently, Seeking Alpha contributor Yoni Jacobs, published the article titled The Impending Collapse of Gold Bubble. As Yoni clearly stated, the collapse of the gold bubble is on the horizon. Whether it is tomorrow or 10 years later, we will see. It is an inevitable normalization not only for gold prices but also for gold stocks. Therefore, I decided to look for the mining companies, which benefited the most from the gold bubble. Naturally, I expect the share prices of these companies to collapse along with gold prices in the future. The Pearson Correlation Coefficient is an appropriate measurement technique for this purpose. This coefficient shows how two variables are related. It is obtained by dividing the covariance of two variables by the product of their standard deviations:
Corr (X,Y) = Cov (X,Y) / (σX* σY)
A value close to 1 implies perfect positive correlation and a correlation coefficient close to 0 implies no relation at all. Stock data is taken from yahoo finance, and historical gold prices are derived from usagold. The last two years of weekly close data is used for the estimation. Here are the results:
Company | Ticker | P/E | P/B | YTD Return | Correlation |
Allied Nevada Gold | 90.39 | 6.31 | 40.86% | 0.96 | |
Nevsun Resources | - | 5.58 | -22.97% | 0.95 | |
Capital Gold Corp. | 24.27 | 3.49 | 24.46% | 0.94 | |
Eldorado Gold Corp. | 41.82 | 2.94 | -14.43% | 0.94 | |
Compania de Minas | 16.65 | 4.47 | -12.93% | 0.94 | |
Gold Resource Corp | - | 20.96 | -9.15% | 0.94 | |
Keegan Resources | KGN | - | 4.36 | -0.34% | 0.94 |
Newmont Mining Corp. | 11.79 | 2.01 | -11.23% | 0.93 | |
Claude Resources | 243.00 | 2.73 | 10.96% | 0.92 | |
Golden Star | - | 1.45 | -36.82% | 0.92 | |
Int. Tower Hill Mines | - | 7.80 | -2.38% | 0.92 | |
Fronteer Gold Inc | - | 3.17 | 29.92% | 0.91 | |
Barrick Gold | 16.17 | 2.69 | -3.37% | 0.91 | |
Central GoldTrust | 4.83 | 1.03 | -0.35% | 0.91 | |
Randgold Resources | 73.33 | 4.25 | 1.54% | 0.91 | |
NovaGold Resources | - | 9.21 | -9.04% | 0.90 | |
Great Basin Gold Ltd. | - | 2.07 | -11.82% | 0.89 | |
US Gold Corporation | - | 6.21 | 8.43% | 0.88 | |
IAMGOLD Corp. | 28.99 | 2.92 | 22.13% | 0.88 | |
Aurizon Mines Ltd. | 66.90 | 3.89 | -8.61% | 0.87 | |
Goldcorp Inc. | 26.19 | 1.95 | 7.30% | 0.85 | |
Gold Fields Ltd. | 79.73 | 1.96 | -2.72% | 0.85 | |
AngloGold Ashanti Ltd. | 257.11 | 4.68 | -0.55% | 0.83 | |
Tanzanian Roy. Exp. | TRE | - | 15.21 | -12.47% | 0.83 |
Royal Gold, Inc. | 80.80 | 2.00 | -4.94% | 0.78 | |
Northgate Minerals | - | 1.44 | -16.25% | 0.77 | |
Agnico-Eagle Mines | 32.21 | 2.97 | -15.81% | 0.76 | |
Entree Gold Inc. | - | 5.56 | -11.56% | 0.74 | |
Rubicon Minerals | - | 4.77 | -8.93% | 0.71 | |
Exeter Resource Corp. | - | 4.82 | -16.91% | 0.71 | |
Yamana Gold, Inc. | 21.15 | 1.28 | -2.27% | 0.67 | |
Northern Dynasty | - | 9.59 | 6.02% | 0.66 | |
Banro Corporation | - | 1.32 | -38.31% | 0.64 | |
Seabridge Gold, Inc. | - | 8.08 | 6.36% | 0.55 | |
Harmony Gold | 253.67 | 1.47 | 21.37% | 0.30 | |
Jaguar Mining Inc. | - | 1.37 | -26.09% | 0.16 | |
Gammon Gold, Inc. | - | 2.10 | 23.32% | 0.05 | |
Kinross Gold | 16.52 | 1.30 | -18.73% | -0.06 | |
Average |
| 72.92 | 4.46 | -3.06% | 0.77 |
As expected, the correlation coefficient between the gold explorers and gold prices is immensely strong. The average Pearson correlation coefficient is 0.77. 16 out of 39 stocks are almost perfectly correlated with gold prices. The above list also shows how insanely gold companies are valued. The average P/E ratio of gold companies is 72.92 (excluding half of the companies with no reported profits). The share prices are traded for 4.46 times the book value. Moreover, there is extreme volatility in year to date returns. While Allied Nevada, returned 40.86%, Banro Corp. lost 38.31%. The average year to date return of the gold companies is -3.06%, whereas the largest gold trust, SPDR Gold (GLD) gained 0.3%.
The analysis shows that not only the gold prices, but also gold stocks have gone berserk. Most of these gold miners are priced way beyond their fundamentals. A recent study conducted by Barclays suggest that gold is expected to be the loser commodity of this year. In my opinion, the only reason gold price sustained its upward trend is the demand by large hedge funds and institutions. John Paulson is the largest owner of SPDR Gold trust [$4.4 billion], followed by Northern Trust [$2.04 billion], JPMorgan (JPM) [$1.28 billion], and Bank of America (BAC) [$1.16 billion]. Both JPMorgan and Bank of America reduced their holdings, where Paulson is cautiously waiting for the overall market sentiment. Once he starts selling of his gazillion dollar investments in gold stocks, the prices will fall off the cliff.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
