Since the beginning of 2013, gold has remained in the spotlight. It certainly receives its share of publicity. Many traders and analysts express their opinions about the fate of gold prices. The drop in the price of gold has caused a spike in interest and demand for physical gold. For example, the U.S. Mint had ran out of its smallest gold coins. But buying coins or talking about the price of gold probably won’t make you one dime richer. In contrast, the striking anomaly described below certainly will.
The anomaly
Gold mining companies, or gold royalty companies, are normally positively correlated with the price of gold, the metal. After all, the main business goal of these gold companies is to dig gold out of the ground and later sell it for mass distribution. This strong relationship between the price of the metal and the business course of these companies normally lead to a tight range of price ratio between gold, the metal, and the share price of gold companies.
But that ratio has been shattered lately. With the price of the shining metal falling roughly 10% since the start of 2013, share prices of gold companies have downright committed suicide. The price of Market Vectors Gold Miners ETF (NYSEARCA:GDX), an ETF which tracks the price of gold mining companies, has plunged by 37% year-to-date. Shares of gold mining giants such as Barrick Gold Corporation (USA) (NYSE:ABX) have experienced an even more severe decline of 43%. Take a look at the chart below comparing the Gold Bugs Index to the value of gold…
With the price of gold falling, shares of gold companies have become out-of-this-world cheap. In fact, relative to gold, gold stocks are as cheap now as they were when gold first entered its bull market 12 years ago. And they’re nearly as cheap today as they were during the mass liquidation phase in October 2008.
The opportunity
Now ask yourself… “When were the two best times to buy gold stocks over the past 12 years?”
The obvious answer is 2001 and 2008. You had to be a die-hard gold bug to buy gold stocks in 2001 after a prolonged bear market in the sector. You had to be equally die-hard to buy during the financial crisis in 2008. But buying at those times would have made you a fortune.The HUI rallied 200% during the first six months of 2002 and rallied 100% just two months after the October 2008 meltdown.
The situation is even better today. Major mining companies are trading at single-digit price-to-earnings ratios, and they are paying twice the dividend yield of the S&P 500. It seems almost silly to call these stocks cheap. The market is giving them away.
How to take advantage of this opportunity
There are various ways you can benefit from this price anomaly. One way is to buy the whole gold mining sector via an ETF – the Market Vectors Gold Miners ETF (NYSEARCA:GDX). After a 40% crash in its price, this cheap ETF is comprised of companies with an average price-to-earnings of only 11x with an average dividend yield of 1.8%. That’s a bargain.
If you wish to dig in more with a search of specific companies — you have two other fantastic options. One is to go with the 300 pound gorilla in the room — Barrick Gold Corporation (USA) (NYSE:ABX). Barrick Gold Corporation (USA) (NYSE:ABX) is a giant $32 billion miner trading at a forward price-to-earnings and price-to-book ratio of only 5.5 and 0.8, respectively. It also rewards its shareholders with a hefty 4% dividend yield while they wait for the share price to reflect value again.
The other, safer option, is to invest alongside a company that isn’t a gold miner, but a gold royalty company. In a world of dirt-cheap gold stocks, Seabridge Gold, Inc. (USA) (NYSE:SA) is the cheapest around. The company has two primary mining projects in Canada. It’s sitting on a mountain of 44 million ounces of proven and probable gold reserves, 214 million ounces of silver, and over 10 billion pounds of copper. That’s more than $72 billion in reserves… Yet Seabridge Gold, Inc. (USA) (NYSE:SA)‘s entire market capitalization is just $550 million.
But, Seabridge Gold, Inc. (USA) (NYSE:SA) will never mine its gold. It’ll never take an ounce of it out of the ground. That’s up to someone else to do. You see, Seabridge Gold, Inc. (USA) (NYSE:SA) is a gold-exploration company. It searches for gold, then partners up with a gold miner that will do the grunt work. And at such a ridiculously cheap valuation, there shouldn’t be any shortage of partners.
The Fool thinks gold
Opportunities like the one above don’t come very often. Giant dividend paying companies trading at ridiculously low prices will eventually rebound. You now have a golden opportunity to take advantage of this beaten sector. So, don’t let that opportunity pass you by.
The article Buy This Golden Anomaly originally appeared on Fool.com is written by Shmulik Karpf.
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