Analyzing the performance of gold prices and the gold mining sector yields intriguing insights into the investment landscape at the midpoint of 2023. While the SPDR Gold Trust (NYSE:GLD) recorded a modest 5% growth during this period, it significantly underperformed the equity asset class. In contrast, the SPDR S&P 500 ETF Trust (NYSE:SPY) saw a remarkable 16% increase, while the Invesco QQQ Trust Series 1 (NASDAQ:QQQ) surged an astonishing 38%.
While gold prices remain merely 7% below their all-time highs, a striking trend emerges when examining gold mining stocks: steep price discounts are prevalent. The VanEck Gold Miners ETF (NYSE:GDX) currently trades at a notable one-third lower than its 2020 peak and a staggering 54% lower than its all-time high in 2011. This attractive valuation has captured the attention of value hunters, who view this as a potential buying opportunity.
By establishing a correlation between the price of gold (GLD) and that of the Gold Miners ETF (GDX) over a 5-year timeframe, it becomes evident that the latter should be trading at least 30% higher than its present levels. This observation raises an intriguing question: does this situation present an opportunity for investors to enter an undervalued sector before its recovery, or does it indicate a potential value trap in the making?
Notably, North American gold miners offer particularly enticing valuations when analyzing the U.S.-listed large-cap companies featured in the VanEck Gold Miners ETF. By employing commonly used stock metrics such as price-to-earnings (P/E) ratios, price-to-book (P/B) ratios, and price-to-median analyst price target spreads, these companies stand out as attractive investment prospects.
Newmont Corporation (NYSE:NEM), one of the world’s largest gold producers headquartered in Colorado, currently trades at a projected 12-month forward P/E ratio of 15, representing one of its lowest ratios in history. Moreover, NEM is trading at $43.1 per share, a substantial 38% discount compared to the median analyst price target of $59.
Barrick Gold Corp. (NYSE:GOLD), another industry giant with a similar forward P/E ratio to Newmont, is also trading at a significant 30% discount to the median analyst price target. Additionally, Barrick Gold boasts a price-to-book value of 1.3x, which is one of the lowest ratios observed in the North American market.
Agnico Eagle Mines Limited (NYSE:AEM), a Canadian-diversified gold mining company with operations in Canada, Finland, and Mexico, currently exhibits a forward P/E ratio of 22x, well below its 5-year average of 38.9x. Furthermore, AEM’s current market prices ($50) imply a 30% discount when compared to the median analyst price target of $65.
In conclusion, the gold mining sector presents an intriguing investment proposition. The sector’s steep price discounts, coupled with appealing valuations of North American gold miners, indicate a potential buying opportunity for investors seeking undervalued assets. However, it is important to exercise caution and consider whether this situation could evolve into a value trap.
