Taking stock

Gold's rally has been accompanied by a rally in gold stocks, particularly those of the producers. The chart shows that GDX, the gold-miners ETF, has risen relative to gold over the past month.

One of the compelling reasons to buy gold stocks as gold rises is, of course, their tendency to outperform the underlying metal; i.e. the price of a stock is leveraged to the price of gold. Analysts at RBC Capital Markets argue that

gold stocks with above average leverage tend to have two key attributes. First, relatively high cash production costs (generally a bad attribute), and, second, large reserve/resource bases (generally a good attribute).

Examples cited of higher-cost producers with large reserve/resource bases relative to their respective peer groups are IAMGOLD, Kinross and Newmont.

Analyst and portfolio manager Adrian Day notes:

If you look at the group of senior producers, they're selling . . . at [a] 13 times cash flow multiple. I go back 20 years, and it's never been less than 13. It's been twice that in previous periods, such as 1966-67, when gold was high. In 1996, again, we were in a strong period for gold and we had 22 times cash flow. So these stocks today, given the price of gold and given where we are in the cycle, are, in my view, very inexpensive.