Miners May Catch up with Gold's Run

09/13/2010 1:30 pm EST


Jack Adamo

Editor, Jack Adamo's Insiders Plus

Jack Adamo, editor of Jack Adamo’s Insiders Plus, says gold is in a true bull market, and lagging gold-mining stocks may be ready to make their move.

Gold seems to thrive lately, no matter what happens. Bullion’s intermediate-term up trend has been pretty steady for nearly two years, with only brief pauses. Of course, the long-term up trend in gold has been in place for more than nine years.

It is the epitome of a true bull market. Aside from autumn 2008, when no one knew what to do with any asset except sell it, gold has not dropped below its long-term up trend for more than a few days.

Although stocks have lost money over the last ten years, gold has remained in a strong bull market. Gold is decoupling not only from the stock market, but from commodities as well. It is rising in the face of a weaker stock market and weaker commodities. Gold is now rising even in the face of a stronger dollar, [so it] may now act not only as a long-term hedge against a weakening dollar, but as a hedge against all risky assets.

All this may indicate that global systemic risk is now coming to the fore, as well it should. The currencies and economies of all the developed nations are being called into question.

Also note that [gold’s] peak-to-trough drop during the crisis was only 30%. The Standard & Poor’s 500 dipped 57% during that period. What was also interesting is that very few gold stocks outperformed the bullion for those five years.

In the past, bull markets in gold have seen the gold-mining shares soar above the price of the metal, based on the assumption that the miners were leveraged to the price of gold, since their variable costs wouldn’t rise proportionate to the rise in the metal.

That assumption has been generally true in the past, but the soaring rise in energy prices from 2003 through 2007 thwarted that expectation. Energy is the second-largest input cost for miners, next to labor. At times, the rise in that cost outpaced the rise in gold’s price, compressing profit margins.

Compania de Minas Buenaventura (NYSE: BVN) was among the anointed few mining stocks to outpace the gold price for the five-year period and the only one to beat it during the last two years as well.

[The Peru-based miner] continues to be the premier gold stock of any significant size. It is selling at 16x trailing earnings and is expected to grow [earnings per share by] 28% next year. Compare that to Newmont Mining (NYSE: NEM), which is also selling at 16x, but is only expected to grow earnings 8% next year or Barrick Gold (NYSE: ABX), which is selling at 15x forward earnings, and is expected to grow 10% next year. The Buy limit remains at $40. (BVN stock closed near $40.50 Friday—Editor.)

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