Current valuations for gold mining stocks and exchange traded funds are offering opportunity to investors in comparison to the metal itself. As central banks boost their gold holdings, miners will benefit as demand for the precious metal keeps rising.
"It's at the point where gold mining stocks are trading at discounts to gold not seen in the past 30 years," Adrian Day, portfolio manager of Day Asset Management said. He notes that gold miners have historically traded at around three or four times book value, but now trade on average at 1.4 times book value.
Profits in gold mining shares and ETFs have been compromised as labor and energy costs to extract gold have risen substantially. In turn, the lagging profits are creating more conflict within the industry. Both Barrick Gold and Kinross Gold, two of the industry's largest domestic gold miners, have replaced their CEOs this summer as company directors seek to shift focus, reports David Sterman for Financial Advisor Magazine.
However, the outlook for gold demand remains healthy as investors have been looking at inflation protection with gold. Friday's closing price of $1,740 an ounce was up 12% since late June, the highest settlement price since February.
The largest gold mining ETFs are a solid choice for investors seeking exposure to gold, with much upside potential. An ETF such as Market Vectors Gold Miners (GDX) is established and already generate a cash flow. The junior miner funds, such as the Market Vectors Junior Gold Miners ETF (GDXJ) focuses on companies in the development stage.
The junior miners are sensitive to drops in gold prices, but would outperform the larger miner funds if gold prices were to gain rapidly, reports Sterman. GDX has currently lost 24% while GDXJ has dropped 35%over the same time period. As companies are working hard to boost profitability, the miners could have plenty of upside to offer.
Market Vectors Gold Miners
Tisha Guerrero contributed to this article.
Full disclosure: Tom Lydon's clients own GDXJ.