Gold Stocks (GDX) Slide, Remain “Undervalued”

GOLD STOCKS NEWS – Gold stocks fell Tuesday as the Market Vectors Gold Miners ETF (GDX) slid $1.04 to $62.66 per share.  The sell-off in gold stocks and the GDX came as gold futures tumbled to $1,875 after earlier reaching a new record high of $1,917.90 per ounce.  The S&P/TSX Global Gold Index, a leading basket of gold stocks in Canada, fell 1.8% in concert with the GDX.

Today’s weakness in gold stocks follows yesterday’s 3.9% rally in the GDX, which brought the gold stocks ETF into positive territory on a year-to-date basis.  However, with this morning’s decline, the GDX cut its monthly and year-to-date gains to 10.1% and 1.6%, respectively.  This compares rather unfavorably to the yellow metal, which has surged 16.2% in August and 32.1% this year.

Commenting on the underperformance of gold stocks and the GDX relative to gold bullion, Rodman & Renshaw analyst Wayne Atwell attributed the weakness to four factors: “Barrick Gold (ABX), the largest gold company is acquiring a copper company, which demonstrates a lack of confidence in gold, 2) investors are buying gold ETFs, not gold shares, 3) some investors are concerned gold may be near a peak and 4) investors are avoiding all shares.”

While Atwell predicted that the yellow metal will “correct shortly,” he contended that gold stocks as a group are undervalued for three key reasons: “they are selling at attractive PE multiples, 2) their business models have improved materially as we look for a relatively strong gold price over the next several years, and 3) we expect M&A activity to pick up shortly which should stimulate investor interest.”

Although the Rodman & Renshaw analyst expected gold to move lower in the short-term, he forecasted that it will peak at $2,200-$2,300 within the next 18-24 months.  As for the factors supporting gold, Atwell wrote that “There is continued fear of the European Union debt crisis could spread into a worldwide debt contagion.  In addition, weak economic data in both the U.S. and Europe are raising fears that developing economies could slip back into recession which could make the debt crisis worse. Lastly, investors are moving out of currencies to protect their buying power.”

Notable gold stocks moving lower on Tuesday included GDX components Barrick Gold (ABX), AngloGold Ashanti (AU), and Gold Fields (GFI).  In morning trading, ABX, AU, and GFI dropped 1.4%, 2.5%, and 4.7%, respectively.

Two gold stocks that bucked the trend of the sector were GDX components Compania Mina Buenaventura (BVN) and Minefinders (MFN), which climbed 0.3% and 0.8%, respectively.