It has been a very difficult period for gold stocks. With limited industrial usage, almost all of the gold produced goes for investment purposes. This has not been serving buyers well as the exchange-traded fund for gold, SPDR Gold Shares (NYSE: GLD), is down more than 20% for 2013.
But a recent article in Barron’s, the investment magazine, pointed out that Barrick Gold (NYSE: ABX), a major gold producer based in Canada, could be undervalued. The article stated that activist investors would probably make a run for Barrick Gold. As a result, the stock price for Barrick Gold jumped due to the bullish report in Barron’s. For 2013, however, Barrick Gold is down by more than 47%.
Understanding Gold as an Investment
Gold rises when other investments sour: it is a traditional “safe haven asset.”
That means that when investors and speculators fear that economic conditions will turn bearish, the market for gold investments such as Barrick Gold, SPDR Gold Shares, and others will be bullish.
It is the same for silver assets, such as iShares Silver Trust (NYSE: SLV), the exchange-traded fund for silver, too. This is especially true when there are fears of inflation. When inflationary conditions set in, the value of paper money collapses.
Many rushed into gold investments thinking the actions of global central bankers would result in higher inflation and lower values for fiat currencies. In the first two rounds of quantitative easing, that is what happened. But that has not transpired after Quantitative Easing III was announced by Federal Reserve Chairman Ben Bernanke in September 2012. As a result, many have lost heavily who bought gold assets expecting another rise in the value of “the yellow metal.”
But that appears to be turning.
Gold Could Be a Buying Opportunity Again
The Barron’s article featured analyst research that projected the worth of Barrick Gold being $44 per share. Barrick Gold is now trading around $17 per share. It is trading at a very low price-to-earnings ratio. In addition, Barrick Gold was upgraded in August by UBS.
Another gold company, Wishbone Gold PLC (OTCBB: WISHY), was just recommended by Beaufort Securities. Wishbone Gold PLC is particularly appealing due its assets in Australia. As India and China are the two biggest buyers of gold in the world, Wishbone Gold PLC should profit from its locale when those economies are in full recovery.
Eventually the actions of the Federal Reserve and other central bankers around the world should result in Barrick Gold, Wishbone Gold PLC, SPDR Gold Shares, and other previous metal assets to fall. That is basic economics: the more that a good is produced without a corresponding increase in demand, the more it will fall in price. If there had been a market demand for the dollars, yen, and other currencies being produced, then central banks would not have had to do all the buying.
Finding an Entry Point
When the price of gold and silver begins to turn, as basic economics dictates that it will, Barrick Gold, Wishbone Gold PLC, SPDR Gold Shares, iShares Silver Trust, and other precious metal assets will all rise.
That is what happened with the previous rounds of quantitative easing. It is taking longer this time, but the fundamental laws of supply and demand do not change, although there are times when it takes longer to make its presence felt in the marketplace. According to Barron’s, UBS, Beaufort Securities, and others, that should be happening soon with gold and silver.
Are you looking for a good time to buy into gold or silver?
Jonathan Yates is a financial writer with degrees from Harvard, Johns Hopkins and Georgetown University Law Center. While much of his career was spent working for Members of Congress on Capitol Hill, he was also General Counsel for a publicly traded corporation; and worked in the research department of a brokerage house.