In his bullish MarketWatch column on gold yesterday (“Does gold know something that gold shares don’t? Commentary: Gold bugs are confident even with gold shares weak”), Peter Brimelow noted that gold mining stocks had lagged the performance of gold itself, and asked whether gold mining stocks might just be “the last train to leave the station?”
You could have asked the same question about oil stocks two years ago, when oil was hitting new all-time highs. In fact, I did. On the old blog, I wrote,
One of the 15 stocks that is up today made a new all-time high, BP Prudhoe Bay Royalty Trust (NYSE:BPT). Shares of this trust had been flirting with the triple-digit mark for the last few months, but finally closed above $100 per share today at $100.77. Despite the 50% total return for this trust over the last year, its stock still looks inexpensive, trading at only about 9x next year’s estimated earnings. This is true, incidentally, of two other, radically different oil stocks I own: the integrated mega cap major ExxonMobil (NYSE:XOM) and the small cap E&P Vaalco Energy (NYSE:EGY) — both trade with enterprise values at similarly low multiples to next year’s estimated earnings. This demonstrates a point I and others have made recently, that despite the huge run-up in oil prices over the last year, the current high oil prices haven’t been priced into many oil stocks yet. Perhaps this is because the biggest oil bulls have been investing in the commodity itself, via ETFs, and perhaps it’s because many market participants believe oil will soon revert back to $70 or $80 per barrel.Flash forward two years, and what has happened? Oil has reverted to trading in the low $70s, and shares of the three oil stocks I mentioned in that post are all trading lower than they were then, though the oil stocks haven’t dropped nearly as far as oil itself (as represented in the chart below by the WTI-tracking ETF USO).
Two years ago, oil stocks apparently knew something oil didn’t know, to use Brimelow’s formulation. Maybe the same is true of gold stocks today?
Disclosure: The author owns puts on GLD.