ASX gold stocks on the nose

Compared to the gold price, gold stocks look attractive

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published December 4, 2012 4:28 pm AEDT

Despite a stratospheric gold price, Australia's gold miners have been struggling to take a trick.

Gold stocks have been hammered recently. Just today the Gold sector lost 2%, with heavyweights Newcrest Mining Limited (ASX: NCM), Regis Resources Limited (ASX: RRL) and Evolution Mining Limited (ASX: EVN) all falling by more than 1.8%, while Medusa Mining Limited (ASX: MML) lost 3.6%.

Overnight, spot gold fell 0.4% to close around US$1,709 an ounce, with last night's fall attributed by some commentators to the ongoing stalemate in US budget talks, as lawmakers seek to avert falling off the Fiscal Cliff. Still, it's higher than it was a month ago, when gold was trading around US$1,680 an ounce. In that time, Newcrest, Medusa and Regis have all lost more than 4%, while the ASX 200 index has risen 1%.

What is interesting that the price movement in Australian listed gold miners appears to be exaggerated on the downside. When the gold price falls, the gold miners fall further, but when gold rises, share prices for the miners aren't catching up.

It seems investors are expecting gold miners to miss their own and analysts' forecasts for the year or two ahead, and are being marked down on suspicion.

Most Australian miners have cash costs of production below US$1,000, (some much lower), so they should still generate a decent gross profit margin in the year ahead, and many are trading on low P/E multiples, compared to the market.

Stimulus measures in the US were expected to put a rocket under the gold price, while expectations that China would increase its holdings of gold from 1.7% of reserves to the global average of around 10% have done nothing for the gold price. Back in September, Deutsche analysts forecast gold to hit US$2,000 early in 2013, driven by increasing demand from central banks, Chinese companies, hedge funds, billionaire investors as well as the factors mentioned above.

The price rise hasn't eventuated, and gold appears set to drift lower, although a US resolution to avoid its fiscal cliff may spur the commodity price higher.

The Foolish bottom line

The disconnect between gold companies' share prices and value and the gold price appears to be increasing. With several ASX listed gold miners trading on prospective P/E multiples of under 5, there may be opportunities for investors in the sector.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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