Gold for immediate delivery closed at $1,250.40 per troy ounce at the end of morning trading on the London Bullion Market on June 27. The precious metal gained $5.15 per troy ounce or 0.41% from the previous trading day.
This is the third jump in the price of gold over the last four trading days, indicating bullion prices are uptrending again after a difficult period in which the metal lost $33 per ounce, or nearly 2.6%, falling to $1,242.50 per troy ounce on June 21 from $1,275.50 per troy ounce on June 14 as a result of the Federal Reserve’s decision to raise interest rates.
According to TD Securities, the uptrend in the price of gold we are currently witnessing is not a short-term phenomenon. Rather, it is going to last for at least the next six months. Within this period, the firm projects gold will trade near $1,275 per troy ounce, which represents a nearly 2% upside from the current market value. As Kitco.com reported, the reasons for TD Securities’ positive outlook for gold resides in geopolitical and economic risks that, together with a flat yield curve and a dovish monetary policy, will encourage investors to invest in the yellow metal.
With a positive outlook for gold, many investors may be considering gaining exposure to the precious metal through investments in the gold stock industry.
To determine which gold stock presents the best buying opportunity, many ratios can be used. Ă‚ Ratios like the price-earnings (P/E) ratio, price-sales (P/S) ratio and price-book (P/B) ratio can be used to measure valuation. Other ratios measure financial strength, such as the quick ratio, current ratio, long-term debt-equity ratio and interest coverage ratio. Ă‚ Profitability can be determined using the gross margin, EBITDA margin and profit margin. The effectiveness of a company's management team can be determined using the return on assets, return on capital and return on equity ratios.
Besides these financial ratios, there is another metric that can be used by investors when screening for stocks. This metric is the enterprise value per ounce of gold reserves, or EVO. This metric is calculated by dividing the enterprise value of the company by the total ounces of gold reserves declared at the end of the fiscal year.
When using this metric to screen for stocks, the idea is the companies can be compared with each other according to the value the market assigns to the company’s total gold reserves. Therefore, the market capitalization can be used instead of the enterprise value when calculating the EVO metric. I prefer the enterprise value over the market capitalization because it takes into account the company’s debt obligations – offering a more accurate value for the gold mining company.
In the chart below, the EVO metric for each of the largest U.S. gold miners is listed. The list also includes Australia's Newcrest Mining Ltd. (ASX:NCM, Financial). The EVO for Newcrest has been converted to U.S. dollars using the most recent exchange rate.Ă‚
Based on the chart, it is not difficult to understand why those gold stocks associated with the lowest metric for EVO may represent the best buying opportunities the industry currently has to offer. Of course, digging up value is not limited to using the EVO metric or other financial ratios.Ă‚
I also like to consider the price of gold per ounce the company uses to determine its gold reserves. This is of fundamental importance to investors because it sets the price at which gold has to trade in order for the company to be profitable.
Based on this criteria, a good investment would be Barrick Gold Corp. (ABX, Financial), which has one of the lowest mining costs in the entire industry. This means the company should – in theory – mine at profit even if gold is trading a slightly above $1,000 per troy ounce.
Since TD Securities forecasts prices will reach $1,275 per troy ounce, however, I think it would be wise to invest part of a portfolio in mid-tier gold producers as well. These companies, which include Iamgold Corp. (IAG, Financial), Yamana Gold Inc. (AUY, Financial) and Eldorado Gold Corp. (EGO, Financial), should begin to outpace Barrick Gold, Goldcorp Inc. (GG, Financial) and Newmont Mining when gold exceeds a certain price point. If $1,275 per troy ounce occurs and holds, it is likely we will witness another increase in the stock price of Iamgold.
Disclosure: I have no positions in any stock mentioned in this article.
