The price of gold topped 1,100 euros/ounce yesterday, its highest point ever against the single currency. The yellow metal is also threatening its US dollar peak, having risen to more than $1,550/ounce today. Europe’s sovereign debt woes have put gold firmly in the safe-haven category again as equity and bond markets remain jittery about the Eurozone’s ability to fight off contagion springing from Greece’s debt crisis.
Both the SPDR Gold Trust (NYSE: GLD) and the iShares Gold Trust (NYSE: IAU) are within striking distance of 12-month highs. The gold mining ETFs, Market Vectors Gold Miners ETF (NYSE: GDX) and Market Vectors Junior Gold Miners ETF (NYSE: GDXJ) have also come back a bit, though for the year-to-date both are off roughly -10%. Miners Newmont Mining Corp. (NYSE: NEM), Barrick Gold Corp. (NYSE: ABX), Yamana Gold, Inc. (NYSE: AUY), and Goldcorp Inc. (NYSE: GG) are all up about 1% today, though Goldcorp is the only miner showing a gain (about 10%) for the year-to-date.
The inability of the Eurozone and the International Monetary Fund to solve the debt problems in Greece has led investors to worry about other Eurozone debtors. Italy is the latest country to be scrutinized and found to be on less firm ground than once thought.
While the jump in gold prices is not usually a good sign for the US dollar, and, at this time, not an especially good sign for the euro, it does bode well for gold miners which have not shared in the run-up of gold prices. Having broken through the $1,500/ounce level again, the wariness about European debt could keep the price there long enough to establish a new floor.
If that happens, then demand for gold will rise again from central banks and bullion buyers. There are also limits to what the gold miners can do to meet higher demand. Production growth is limited by the price of gold — lower prices mean less investment by miners in increased production. Of course as the price rises this limitation disappears, but then gold miners face rising production costs for labor and equipment.
Demand from India and China for gold to make jewelry and other items is expected to continue growing beyond its current level of about 60% of total production. Furthermore, China’s central bank holds less than 2% of its reserves in gold. The global central bank average is about 11%. If the People’s Bank of China decides to beef up its gold holdings, miners will see an immediate rise in gold prices and a demand for even more.
With the exception of Goldcorp, the other miners we’ve mentioned here have a forward P/E ratio of in the neighborhood of 10. Yamana’s price/book ratio is just 1.29, and the others are right around 2.
We looked at some smaller mining companies about a week ago and found very little uncovered value to recommend there. That does not look to be the case with these bigger miners. And while these large miners are also trading below 52-week highers, the differentials range from -16% to -6%, a far cry from the junior miner differentials of about -60% to -35%.