Precious Metals sector is an asset class I have been keeping my eye on for many years. The present gold bull run started in the beginning of this century but precious metals stocks generally underperformed against gold. Now, this undervaluation is at its extremes. Let us look at the chart:
XAU (the Philadelphia Gold and Silver Sector Index) represents 30 gold and silver miners. As you can see at the chart, most of the time this index was trading in the range between 3 - 6 against gold. But in 2008, when the last uptrend leg in gold prices started, at the same time miners shares started to underperform against gold prices in an astonishing way. What happened ? I guess many investors at last understood that the miners were not such good businesses as they thought. The main constraints were as follows:
- the miners managers did not seem to care about the shareholders value - mining companies were offering more and more shares to buy precious metals assets at rather high prices
- most of the existiing gold and silver reserves were of a very low grade
- the operating expenses were rising much faster than the precious metals prices (low grades participated here very much)
- most recently, due to decreasing gold and silver prices, many miners impaired their mining assets - this had a big negative impact on the miners earnings.
In effect, today we see the biggest undervaluation of the miners against gold prices since 1985.
Is it a buying opportunity ? Well, your decision.
P.S. The third quarter earnings season will show whether there are any changes in precious metals miners' fundamentals. Expect my report on that subject.
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