Gold Stocks at Second Cheapest Level in 30 Years

“The market seems to have penalized companies for the rising costs associated with lengthening the life of a mine operation…the market does not seem to be paying for the optionality offered by increasing reserves when they come with increased costs…. the average global cost per ton has been rising at a rate that is slower than the gold prices increase; however, it has also been accompanied by a declining grade profile for most operations.”

- CIBC's Barry Cooper

While it's true that these rising costs are putting a strain on miners' profitability, it's important to keep it in context. While cash costs have increased 19 percent, profit margins—the true gauge of a company's value—have expanded 25 percent on average, more than offsetting the cost increases. By this measure, one can purchase shares of gold mining companies at their second-cheapest level in nearly 30 years.

Historically, one could purchase about 4.4. units of the XAU for the price of an ounce of gold. That ratio fell to less than 3 units per ounce in the mid-1990s when gold prices bottomed but has averaged 5.2 units during the current bull market.

One way gold companies can lure investors is by sharing their profits through dividends. This would provide a cash incentive to hold shares of the company and allow investors to participate in rising earnings. We like the idea of investors getting “paid to wait” or reinvesting those dividends and purchasing additional shares at potentially lower prices.

With gold companies currently undervalued and offering strong cash flows and attractive yields, we think gold equities will be rewarded by the market and rise with strong gold prices. BMO Financial analyst Don Coxe echoes our sentiment: “gold and gold stocks offer a protection that is going to become more valuable in the period of months ahead. It's possible that the long-awaited period, when gold stocks outperform bullion, is coming soon.”