In conversations with everyone from fund managers to bartenders to the babysitter, it's pretty clear: Everyone (still) loves gold.
But after the record-shattering rally of the summer, the love affair, like any maturing relationship, has gotten more complicated. Increasingly, the question for investors has become, which gold should we love? Bullion itself, or the stocks of gold producers?
It's a question that really needs to be broken into two parts. First, we need to ask how much upside might remain in gold's rally. And second, we must consider whether gold stocks look cheap or expensive relative to the precious metal that, ultimately, defines their value.
Long, but not unprecedented
In a recent research report, the mining team at TD Securities noted that the current rally in gold is 19 months old – making it the third-longest of gold's 10 rallies in the past decade (gains of at least 15 per cent or more that preceded corrections of at least 10 per cent). While it has gone on much longer than the average rally (332 days, or roughly 11 months), it still has a ways to go to match the 24-month rally of 2004-06 or the 22-month rally of 2001-03. The rally has been long, but not unprecedented.
In terms of price gain, though, the rally is closer to pushing its historical limits. The 79-per-cent gain in bullion makes it the second-biggest rally of the past 10 years, trailing only the 91-per-cent gain booked in the 2004-06 surge. The average gain in the past decade's 10 rallies was 46 per cent.
Stocks that have lots of room
Gold-producer stocks are an imperfect and sometimes complicated way to get exposure to gold. Some companies produce other metals in addition to gold, there are varying geographical and production issues they may face, they have differing growth prospects, and then there are hedging programs that affect the price they ultimately get for their gold – all of which can distance the price of the stocks from the performance of gold.
That said, gold and gold stocks typically do move in the same direction – and over the past decade, they have both rallied and corrected together. And, gold equities have outperformed bullion in seven of gold's 10 rallies in that time – by, on average, an impressive 40 per cent.
The TD analysts noted that despite the 57-per-cent rise of the S&P/TSX gold index during the current gold rally, stock gains to date represent the worst performance, relative to gold, of any of the upswings of the past 10 years. It would seem that gold stocks still have a lot of catching up to do. "Applying the average [outperformance]to this rally would see the equities about 35 per cent higher than they currently are," the analysts wrote.