Are Gold Stocks Undervalued?

With the price of gold on a steady climb in the past 4 years going up from $800/ounce to over $1700/ounce you would think that gold stocks would be following suite, not the case for most mining companies in the past four years.

You may have heard about the lack of performance in gold stocks over the past 4 years and how companies like Barrick and Newmont mining are under-performing the market. Barrick gold corp for example has gone from the $50/share range in 2008 to the recent 34.97/share price in November.

Certain companies will do better than others for different internal reasons related to overall production, cost of production and working net capital. It’s crucial to fully evaluate specific companies based on the underlying value to share price and not just on the price of gold as it has been made apparent over the late gold rush that gold stocks do not automatically rise with higher gold prices.

However, there are indices that track various different mining companies and act as a gauge to how well the sector has been performing. This can be important data in determining whether the industry as a whole is undervalued when compared to the physical metal.


The symbol HUI stands for ARCA gold bugs (basket of unhedged gold stocks) and trades on the NYSE under the symbol HUI. This index is comprised of companies that do not hedge their gold production beyond 1.5 years. There are currently 15 companies within the index which are the largest gold producing companies in the industry.


The XAU on the other hand is the second most popular gold index in the world at arm’s length with the HUI index. XAU stands for Philadelphia gold and silver index which contains 16 precious metal companies and trades on the Philadelphia stock exchange.


GDM (gold miners’ index) includes 31 mining companies primarily in the gold and silver sector of which 72% are large cap, 22% medium cap and 5.5% small cap. The gold miners’ index trades on the NYSE under the symbol GDM.


The S&P/TSX Global gold index consists of 19 precious metals companies whom are mainly involved in gold exploration and production. This index is outweighed with large caps over small caps with a near 4:1 ratio. The Global gold index trades under XGD on the TSX exchange.

Current gold to index trend from the beginning of 2008 to Nov.2012

In 2008 Gold was extremely volatile fluctuating from mid-high $700 to high-$900/ounce. Since this period gold has risen and is now trading at $1750/ounce and has fluctuated in the high $1700 and low $1550/ounce.

Let’s compare the different indices to see the trading patterns they have resulted in to try and find a pattern between the price of gold and the average weighed share price for gold stock indices representing a variety of different gold stocks. 


In January 2008 the HUI index was trading at a range of $380 to $400/share. This is prior to the recession of 2008 that occurred mid-way through the year. Gold stocks had a highly negative effect which brought the HUI down to $170/share. Quickly prior to the downfall the HUI recovered and was trading at $300 at the end of 2008. Trading moderately corrected itself throughout the years and is now trading at $460/share which is lower than in 2008 prior to the market collapse high of around $510.


The Philadelphia gold silver sector index had a similar activity corresponding with the HUI. Both indexes incurred significant losses and have rebuilt but are trading at below 2008 post recession highs. 


The GDX as well has similar patters to the XAU and HUI and trades below the post recession high.


The Global gold index has seen an interesting down trend in 2012 declining from the $450 range to $318 and now trades below post recession 2008 highs of $370.

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