Down from its Peak, Gold Could Now Be an Opportunity
If there’s one mistake that investors could make now, it would be to ignore gold prices. Yes, over the past few weeks, gold prices have taken a lot of scrutiny from investors, but don’t get too discouraged by it. The yellow metal is hands down one the most undervalued assets of today.
U.S. stock markets are currently trading at a cyclically adjusted price-to-earnings (CAPE) ratio of 30.05. This is the highest valuation on the stock market since the Tech Bubble. Prior to that, the CAPE ratio was higher in 1929, just before the greatest stock market crash in history. (Source: “U.S. Stock Markets 1871-Present and CAPE Ratio,” Yale University, last accessed July 11, 2017.)
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Bonds have also been a great performer over the past 10 years. Since the Great Recession, thanks to low interest rates, bonds have been rallying. But interest rates are on their way up, especially in the United States. Basic economics say that, when interest rates go higher, bond prices go lower.
When you look at how well stocks and bonds have performed over the past few years, gold prices look dirt cheap.
Gold is down 37% from its peak in 2011. While investors are paying top dollar for stocks and bonds, the fundamentals for both are deteriorating. For gold, it’s the complete opposite situation.
Demand for gold is surging while supply is dwindling; the perfect storm for much higher gold prices.
On the demand side, in May of this year, India imported more than $4.95 billion worth of the precious metal. Assuming that gold prices averaged $1,250 an ounce in that month, it means that India imported 3.96 million ounces of gold in May, which equates to 3.7% of total estimated global mine output for the year! (Source: “Quick Estimates For Selected Major Commodities For May 2017,” India Ministry of Commerce and Industry, last accessed July 11, 2017.)
I have said it several times before: gold mining companies are something that investors ought to pay attention to.
Fortunately for gold bugs like me, investors have ditched gold stocks due to low gold prices. This is illustrated in the chart below of the Gold Bugs Index. Essentially, this index tracks the stock performance of major gold mining companies.
Chart courtesy of StockCharts.com
While gold prices are down 37% from their peak, gold mining stocks have cratered by nearly 60%.
I believe that once gold prices rise, gold mining stocks will provide investors with immense returns. That’s why I’m so bullish on the shares of quality senior and junior gold-producing companies.
