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Mining stocks lag gold based on history, leaving potential upside – Gabelli’s Bryan

Equities of gold-mining companies still appear undervalued based on a historical comparison of where they were trading relative to the price of gold during the last bull-market cycle, said Caesar Bryan, portfolio manager of the Gabelli Gold Fund (symbol GOLDX for AAA shares and GLDIX for institutional class of shares).

Meanwhile, gold itself is likely to hit fresh record highs in the aftermath of massive monetary accommodation and fiscal stimulus in response to the COVID-19 pandemic, he told Kitco News in an interview this week. And as gold prices climb, that means more revenue for producers.

Gold and mining stocks alike fell sharply in mid-March when investors were selling a broad array of assets to generate liquidity when the broader stock market went into a free fall. However, spot gold rebounded from mid-March lows near $1,450 an ounce to a seven-high year near $1,780 on Wednesday.

But while gold-mining stocks have also risen, Bryan commented that “they really haven’t done anything yet” compared to the last bull-market cycle, thus leaving potential for further upside in share prices.

“They [share prices] have had a very nice recovery, but the performance does not reflect the gold being at this level, let alone appreciating,” Bryan said.

Higher gold prices mean increased cash flow and earnings for producers, although in some instances companies’ second-quarter results will be adversely affected by government-mandated temporary shutdowns in response to the pandemic.

In fact, Bryan pointed out, the Philadelphia Gold and Silver Index of mining stocks (XAU) is still nearly half of where it was at the peak in 2010. It was around 117 as Bryan spoke to Kitco News, compared to a record high of 232.72 nearly a decade ago. Meanwhile, gold just above $1,760 is much closer to its 2011 record high of $1,921.

“The gold price is down about 8% or 10% [from its record],” Bryan said. “So gold equities are very cheap and should do very well.”

The fund manager said he looks for the XAU to eventually move to a fresh record high.

“Companies are going to increase their dividends. Companies that don’t pay dividends are going to institute dividends,” Bryan said. “B2Gold has done that, and Dundee Precious Metals has done that recently. Barrick and Newmont have raised their dividends. This reflects strong and improving free cash flow.

“At about $1,740 [gold prices], the very big companies have free cash-flow yields for the current year of 5% to 7%-8%. And some of the smaller ones and midcaps are way in excess of that. This is an industry which is going to show tremendous earnings momentum compared to the rest of the [stock] market, which is going to be struggling.”

Bryan suspects that some so-called “generalist” investors have moved into gold equities but this is probably still “limited.” He pointed out that all of the companies in the XAU index have a combined market capitalization of some $220 billion. By contrast, the market cap of just one major bank, JP Morgan Chase & Co., has a market cap of some $300 billion.


Gold expected to hit record high

Bryan looks for gold to “easily” break its 2011 record high and eventually move above $2,000.

“Technically, the price has broken to a new high,” Bryan said. “So there’s potential to move up to the old high of [around] $1,920 in pretty short order.”

Fundamentally, there has been more “blurring” between fiscal and monetary policies than in the past, he related. Compared to the 2008-09 financial crisis, the Federal Reserve currently is undertaking major lending programs using funds contributed by the Treasury, he related. Further, the Treasury’s bank balance with the New York Federal Reserve has grown to some $1.6 trillion, an unprecedented level, Bryan said, noting that this was probably no more than $400 billion in recent history. Much of this debt has been purchased by the Fed.

“That’s adding to the gold story,” he said, noting there will be eventual “consequences” to the economy and financial system.

“At some point, investors are going to go ‘wait a minute; how do we hedge this?’ and ‘what do we do about this?’” Bryan said. “That’s why gold is percolating to the upside despite a very strong financial performance [with equities up sharply from the March lows].”

Further, Bryan pointed out, there have been rapid increases in various measures of money supply, such as M2. He explained that this may lead to longer-term consumer-price inflation “coming a little bit quicker” even though the immediate impact of economic weakness was 0.1% and 0.8% declines in consumer prices during the last two months. Investors often buy gold as a hedge against inflation.

“I think gold is going to continue to work its way higher,” Bryan said.


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