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A Good Time to Dig Into Gold Miners?

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There’s lots of talk about gold right now — and not just in the wake of the Olympics in Sochi.

The Market Vectors Gold Mining ETF (GDX) fell more than 40% in 2013 but has risen about 20% through mid-February. And the Market Vectors Junior Gold Mining ETF (GDXJ) is up about 30% this year after slipping 53% in 2013.

Simona Gambarini, associate director of research for ETF Securities in London, believes it’s time to get back into these equities. (Jeffrey Gundlach of DoubleLine also voiced his support for gold miners earlier this year during a webinar.)

While many of the leading miners’ stock prices and industry ETFs have dropped by 50% or more from their peaks in mid-2011, their prices are attractive, experts say.

In a recent report, Gambarini explained: “With gold mining stocks trading at the lowest level since 2008, we believe they have reached a point where upside potential now far outweighs downside risks, making this a good entry point for investors with medium-term time horizons.”

ETF Securities estimates that gold miners still may have $113 billion of reserves to write down, but this situation has already been reflected in its price movement.

“On our estimates, gold miners’ shares are currently trading at a 4% discount to their book value, and many are now trading at attractive long-term accumulation levels,” Gambarini noted.

Spot gold traded seemed to have stabilized at around $1,250 an ounce earlier this year, but gold for April delivery traded at nearly $1,317 on Feb. 20.

With general equity market sentiment expected to remain positive, she says, gold miners “appear to be in a position to outperform gold.”

In a phone interview with ThinkAdvisor, Gambarini cited several trends supporting her call.

First, shares of gold miners are undervalued relative to book value. The stocks are trending below the value of the miners’ assets — i.e., their estimated reserves — while they normally trade at a premium.

Part of the challenge in valuing these reserves has been gold’s price volatility, she explains. Gold prices rose for much of the past decade, but the recent price pullback means miners must adjust their price forecasts and reserve valuations downward to reflect current and anticipated market conditions.

Stable gold prices help miners, says Gambarini, by allowing them to focus more closely on their operations and avoid additional reserve write-downs.

Another supporting factor: Miners have substantially improved their business strategies and cost containment efforts. These changes are not (yet) reflected in the stocks’ prices, Gambarini maintains.

Additionally, as the global economic recovery continues to pick up, equities should benefit, including mining stocks, she says. (The last time gold traded around $1,250 an ounce, gold miners’ shares were trading about 111% above current levels.)

If the miners look attractive, isn’t it also a good time to invest in gold as a metal? Not necessarily, the expert argues.

Gambarini points out that the metal and its miners differ in how they are affected by different economic and market scenarios.

“Historically, gold miners have tended to outperform the gold price when global business activity, as measured by the OECD World Lead Indicator, has been high and rising,” she explained in the report. “Conversely, the gold price has tended to outperform gold miners when growth has been slowing and the global economy has been in a downturn, as in the aftermath of Lehman Brothers’ collapse.”


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