So far in 2011, gold is up 8 per cent yet gold equities are down 14 per cent. That isn’t pretty, and longer-term the picture isn’t any rosier. Since mid-2007, gold is up 135 per cent, while gold equities are up only 64 per cent.
This trend has been noted before, but no one really seems to understand what’s driving it. A bunch of theories have been thrown around, but Greg Barnes at TD Securities wasn’t content, so he decided to do some research of his own. With that now complete, Mr. Barnes believes that one of the biggest factors is simply a broad market contraction in stock multiples.
To come up with this theory, Mr. Barnes and his team examined the six largest global companies (by market capitalization) in the following industries: technology, consumer stocks, diversified miners, energy, industrials and financials. They then compared these industries' price-earnings and price-to-cash flow multiples to those of the six largest gold producers. The result: proof that from June, 2007, to June, 2011, multiples have contracted in every single one of these industries.
However, it’s worth noting that gold producers have taken one of the biggest hits, with a 45 per cent lower forward price-earnings multiple, and a 29 per cent drop in their forward cash flow multiple. Technology names were also bad, with about a 43 per cent drop in both multiples.
Mr. Barnes thinks this makes sense in a broad market context. “For the S&P 500 as a whole, forward earnings have rebounded to pre-crisis levels yet the index remains 15 per cent below its pre-crisis high and the S&P 500 forward earnings multiple has declined 17 per cent.”
He also looks at some star companies, like Apple Inc., which has 2011 consensus earnings of $24.85 (U.S.) per share, against $3.53 expected in 2007. Yet the company’s forward P/E multiple is only 12.7 times now against 34.6 in 2007.
Still, Mr. Barnes isn’t discounting a number of other factors that have made gold producers lag the metal. They include: the rise of gold bullion ETFs, cost inflation that has hit producers’ margins and equity investors simply not believing that $1,500 gold is sustainable.