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if you fancy yourself a contrarian value investor at heart who happens to love the vast potential of gold stocks in this ongoing commodities bull, this table is going to feel like a swift kick in the teeth with steel-toed boots. If I wasn't a battle-hardened speculator I probably would have cried when I first saw it. Nevertheless this data is very real and can be verified in minutes. The entire gold stock sector is radically expensive!
Out of the 15 stocks that comprise the venerable HUI, the blue-chip golds, fully 7 are losing money today despite gold challenging $600! Isn't this strange? And of the remaining 8 that can somehow manage to mine gold at a profit today, their average P/E ratio is a staggering 78x, even higher than NEM's. If you don't feel sick enough yet, FCX is a primary copper miner which is the only reason its P/E is under fair value. If FCX is excluded, the average profitable HUI gold producer's P/E soars to 87x! Ouch.
And the larger XAU, which includes more big gold miners since it accepts hedgers, isn't looking much better. 7 of its 16 components are losing money in today's awesome gold and silver environments too. The remaining 9 companies are averaging a wickedly high P/E of 74x earnings. And if the same primary copper miner that is also found in the HUI is excluded, the average XAU P/E rockets to 82x. This is systemic.
As I examined this table in stunned silence this week, another irony leapt out at me. You folks who have been around this bull awhile certainly remember Barrick Gold, ABX, the notorious mega hedger. Four or five years ago this company was the evil empire among hardcore pro-gold investors. Many people including me spoke out against ABX's irrational hedging program which was hindering the gold bull's progress. There was a time not too long ago when this company couldn't have been more loathed even if it was sacrificing babies to Molech.
Interestingly out of all the world's largest gold miners, ABX now has the lowest valuation at 39x earnings. This is still high, but it is only about half of the average these days. ABX has been reforming itself and reducing hedges in recent years, but it is still not viewed favorably by the lion's share of gold investors due to its past deeds. It struck me as ironic that the black sheep of the gold major world now has the lowest valuation. Will wonders never cease?
Now all these gold stock overvaluations could at least be rationalized if similar phenomena were being witnessed in other major commodities stock sectors. But this isn't the case. The XOI oil stock valuation data in this chart shows that major oil stocks have average P/Es that are dirt cheap, around 9x earnings. Oil stock profits have climbed far faster than oil stock prices so oil stocks are unbelievably good deals today. Oil stocks are doing what gold stocks should have done in the past couple years.
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Like all big companies NEM constantly issues new shares for various things ranging from paying for acquisitions to paying stock compensation for its management. Over time this dilutes existing shareholders. If total shares outstanding grow by 10%, for example, your stake is worth 10% less even though you still hold the same number of shares.
Dilution is to a stock exactly what inflation is to fiat-money supplies. The more shares issued the more the value of your own stake erodes. Dilution is a little-watched but hugely expensive cost we investors must bear. And while NEM is by no means bad in this regard compared to other large companies like tech stocks, this chart really illustrates how issuing more stock can decimate gains over time. Two-thirds of NEM's total gain in market value over the past five years has been lost to investors due to it issuing so much new stock.
Back to the task at hand, the reason I updated this chart was to see the red line, which is NEM's price-to-earnings ratio plotted on a monthly basis since the genesis of this gold-stock bull in November 2000. This trend was very favorable for several years but then about two years ago it reversed to an unfavorable direction. For two years now my thesis that gold stock valuations would contract has been disturbingly incorrect, despite gold soaring about 50% from $400 to $600.
It all started back in November 2000, when NEM was trading at 126x earnings. To put this into perspective, during that same month Cisco Systems, the most notorious bubble stock of the tech mania, was still trading at 134x earnings! Thus contrarian investors like me who wouldn't touch the radically overvalued tech stocks with a ten-foot pole
No wonder my Oil stocks have performed lot better then Gold stocks. Infect most industrial commodities miners have gone to the moon. In the end real gold may out perform most gold miners.
Some gold miners may not make you any money
