Editorial: Gold stocks: the new value play?

The game of gold investing never gets dull for investors who get to ponder the delicate interplay of geopolitics, macroeconomics, heavy industry, mineral exploration and fashion trends that give us our ever-changing prices for gold bullion and mining stocks.

One of the usual tasks of gold enthusiasts is coming up with reasons why gold mining stocks are grossly overvalued compared to those of just about any other resource sector — often trading at values that assume all of a gold miner’s in-the-ground reserves have already been mined out at a profit.   

The need to do those kinds of mental accounting gymnastics has been put on the back burner for a while, as the stocks of the biggest gold mining companies have recently entered the zone of — gasp — value investing.

The prime driver of the painful fall in gold miners’ stocks has been the desultory performance of gold prices over the past couple of months: spot gold has plummeted US$114.50 per oz., or 6.9% over the past month, to US$1,544.00 per oz. at presstime, and is off more than US$200 from the highs seen in February.

From the year-to-date perspective, it doesn’t look quite so bad for gold, with the gold-backed SPDR Gold Trust exchange-traded fund off only 1.5% this year at presstime, and the spot gold price down 1.9% year-to-date.

Still, with global economic uncertainty intensifying in recent weeks in the face of worsening Greek debt problems, once again we’re seeing that the U.S. dollar is the preferred short-term safe haven compared to gold for investors getting out of the euro.

At presstime, as Greek politicians failed to form a coalition government to address the country’s sovereign debt crisis, the U.S. dollar is trading at its highest level since January. According to The Wall Street Journal, the ICE dollar index, which measures the U.S. dollar against a basket of six currencies, has had its longest winning streak — 12 up sessions in a row — since at least 1985.

With gold-mining stocks leveraged to gold prices, we’ve all witnessed the brutal share-price declines year-to-date of even the highest-quality gold miners: Barrick Gold is down 23% year-to-date, Newmont Mining has fallen 28%, AngloGold Ashanti is off 27%, Kinross Gold has sunk 36%, Goldcorp has dropped 26%, Agnico-Eagle Mines is down 6% and Yamana Gold is off 11%.

The price-to-earnings ratios of the big miners are all over the place, ranging from Kinross’ and Agnico’s “not-applicable” to Newmont’s 41, as some companies have taken large, one-off writedowns on select underperforming mines.  

Overall, though, gold mining has entered a time of tremendous cash flow and profitability that makes it easy to sustain and even grow dividends. And so with majors such as Barrick and Newmont recently hiking their dividends even as their share prices have tanked, the dividend yields are looking pretty attractive during our era of rock-bottom interest rates.

Have a look in wonder at today’s juicy dividend yields across the board among the gold majors, according to Google Finance: Barrick, 2.29%; Newmont, 3.23%; AngloGold, 3.43%; Kinross, 2.19%; Goldcorp, 1.66%; Agnico, 2.36%; and Yamana, 1.68%.

Yes, that puts them in the same league as the big-four base metal miners: BHP Billiton, 3.34% dividend yield; Anglo American, 2.25%; Vale, 6.06%; and Rio Tinto, 3.13%.

But how about in comparison to the stocks making up the blue-chip Dow Jones Industrial Average? The average dividend yield on the 30 Dow stocks was 2.80% on May 11, and the average dividend yield for the Dow’s 10 highest-yielding stocks (i.e., the traditional “Dogs of the Dow”) was 3.87% on May 11.

Aluminum-giant Alcoa, the only mining stock that is a component of the Dow, is up 0.7% year-to-date and has a dividend yield of only 1.38%.

It may not happen often, but gold mining stocks have entered a new phase that makes them potentially attractive to yield-seeking investors. Let’s hope that brings a fresh round of investors to the suffering sector.