The ratio of spot gold to the PHLX Gold/Silver Sector and S&P/TSX Gold Indexes are at levels that have historically generated positive returns.
To put into perspective how bad the damage was to gold equities last fall, check out the following chart that plots the ratio of spot gold to the PHLX Gold/Silver Sector Index (XAU).
Source: Bloomberg, Pinetree Capital Ltd.
This ratio is a common method of gauging the relative valuation of gold equities to the gold price. The XAU is a capitalization-weighted index of 16 gold and silver producing companies; the four largest weights are currently Barrick, Goldcorp, Newmont and Freeport (which is much more influenced by copper than gold prices).
During last fall’s meltdown, the ratio jumped to a record 9, blowing past the previous high mark of 6 back in 2000.
Previously, when the ratio hit 5 or higher it signaled a “buy” for gold equities as the XAU generated a positive return in the subsequent 12 months (except for the period following June 30, 2009). However, the one-year returns for the XAU since March 31, 2008 and April 30, 2008 have been negative given the market pounding last fall.
Source: Bloomberg, Pinetree Capital Ltd.
The gold-to-XAU ratio currently sits at 6.9.
The ratio of the gold price denominated in Canadian dollars vs. the S&P/TSX Gold Index, a group of TSX listed gold producers and explorers, has not historically generated such a clear-cut buy signal as the gold-to-XAU ratio.
Source: Bloomberg, Pinetree Capital Ltd.
Source: Bloomberg, Pinetree Capital Ltd.
After taking into account last year’s results, whenever the ratio climbed above 0.35, the return of the S&P/TSX Gold Index over the subsequent 12 months was positive 74% of the time. The ratio now stands at 0.42.
Though the gold price has been struggling against a rise real interest rates, gold equities in both the U.S. and Canada are at a level relative to the gold price that historically generated positive returns.
Craig Stanley (cstanley@pinetreecapital.com) is an analyst at Pinetree Capital Ltd. The views expressed in this article are the personal views of the author and do not necessarily reflect those of Pinetree Capital Ltd. The information and commentary provided is not intended to and should not be interpreted as offering any advice regarding the nature, potential value or suitability of any security or investment, including the securities of any of the issuers referenced in this article or of gold as an investment approach. The information and any statistical data contained herein have been obtained by sources believed to be reliable, but the author does not represent that they are accurate or complete, and they should not be relied upon as such.
