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Gold Stocks Look Cheap Compared to the S&P 500—What’s Next?

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Gold miners see selling pressure

Along with gold, gold miner stocks (GDX) (NUGT) are also seeing a lot of selling pressure lately. Gold equities are essentially a leveraged play on gold prices and as such, they usually move in the direction of gold prices with greater intensity. This is also true of price performances YTD (year-to-date). 

On August 15, the VanEck Vectors Gold Miners ETF (GDX) has lost 20.0% of its value YTD, almost double the losses seen by the SPDR Gold Shares ETF (GLD).

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While the index as a whole has fallen by 20%, other miners are trading with much higher YTD losses. Among the major gold miners, Kinross Gold (KGC), Barrick Gold (ABX), IAMGOLD (IAG), AngloGold Ashanti (AU), and Agnico Eagle Mines (AEM) have lost 33.8%, 31.0%, 28.0%, 26.5%, and 23.1% of their values, respectively, year-to-date.

Gold miners versus the S&P 500

Gold miners as a whole have started looking inexpensive compared to the broader equities. The average ratio between the NYSE Arca Gold Miners Index (GDX) and the S&P 500 Index (SPX)(SPY) is 0.18 compared to the ten-year average of 0.68.

While the broader equities valuation continued to increase, the valuations of gold stocks didn’t keep pace and the ratio declined. Gold miners haven’t kept pace with the growth in gold prices in recent years. Some of the miners’ underperformance compared to gold can be explained by company-specific issues that caught up with the miners. 

Gold’s inability to hold onto a rally over the past two years has created unease in investors. Therefore, gold would need a sustainable bull run before gold miners could catch up to gold.

Gold stocks to outperform?

Gold companies have emerged as leaner and more profitable businesses after gold prices fell from the peak in 2011. Most of these companies are focusing on improving their cost structures and production profiles. 

However, these companies aren’t seeking growth for the sake of ounces. Because gold companies have been focusing on productivity and have become more competitive, they’re expected to close their valuation gaps on gold and start trading higher.

You can also read Why the Risk-to-Reward Ratio Could Favor Gold Bulls Now? for more on the outlook for gold prices.

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