Financial Analysis of Gold Market – September 2017

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As we all know, the price of gold miners has a direct relationship with the underlying yellow metal they produce. If the price of gold increases, it means more revenue and income (hopefully) for the gold miners. Gold has come a long way from bottoming at the beginning of July to ending the month of September up ~6%.

Bubble size represents market cap

FIGURE 1: PERFORMANCE OF GOLD MINERS

Description: Figure 1 highlights the performance of the gold mining industry for the month of September 2017 (x-axis) and the performance of the 11 months prior to September 2017.

As we all know, the price of gold miners has a direct relationship with the underlying yellow metal they produce. If the price of gold increases, it means more revenue and income (hopefully) for the gold miners. Gold has come a long way from bottoming at the beginning of July to ending the month of September up ~6%.

But certain variables that have helped prop up the price of gold recently are temporary. Major factors include nuclear missile tensions with North Korea, hurricanes Harvey and Irma, the unstable nature of Trump’s administration, and the dovish environment of the Fed. If we look closely, we know these things shall pass. Hurricane season is coming to an end, a nuclear war with North Korea is unlikely in this day and age, the Trump administration is taking a long time to find its footing but eventually it will happen, and the Fed may not turn out to be as dovish as the markets make it out to be.

The Fed’s role, when it comes to gold prices is also a significant one. The Fed sets the course for the interest rates which has an enormous impact on the strength of the US dollar, which in turn affects the price of gold. We know that interest rates have an inverse relationship with the price of gold. The lower the interest rates the more attractive gold is to investors seeking safe havens. Currently, CME group’s Fed Watch Tool has the chances of the Fed raising interest rates at under 30%. However, the Fed will begin unwinding its balance sheet later this month. When the Fed begins selling its bonds, this will affect supply-demand in the market, driving rates higher. Hence, increasing interest rates may not be the only tool at the Fed’s disposal, especially when it can influence interest rates by selling bonds.

Meanwhile, from a fundamental analysis point of view, gold stocks do not appear to be very attractive at this time. The price to earnings ratio, price to sale ratio, and debt on the balance sheet of gold miners makes their stocks appear expensive compared to the S&P 500.

Price to Earnings  (P/E)  Price to Sales (P/S)
ABX: Barrick 20.4 2.15
NEM: Newmont 28.85 2.85
NCM: Newcrest 40.2 4.62
GG: Goldcorp 26.02 3.22
AEM: Agnico Eagle 51.03 4.72
Average 33.3 3.512

As the above table indicates, the average P/E is much higher for the top 5 gold mining stocks (by market cap) when compared to the S&P 500 stocks on average. The current S&P 500 P/E is 25.30 and the price to sales ratio is 2.17, while the average P/E for the above gold miners is 33.3 and the price to sales ratio of 3.5.