Gold Update | Q3 2017

Gabelli Research Analyst Christopher Mancini discuses Gold and Gold equities.

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Gold stocks have significantly underperformed the price of physical gold recently. Since February the prices of gold stocks, as measured by the Philadelphia Gold and Silver Miners Index, is down 20% while the price of physical gold is flat during the same period.

This dynamic is reflected in the ratio of the value of the XAU index to the price of one ounce of gold. This ratio is at its lowest level in over a year. Our proprietary model based on our fundamental analysis indicates that gold stocks are currently 20% undervalued based on spot gold prices.

Our model says that if the gold price increases by $150 per ounce to $1400 per ounce, gold stocks would be 50% undervalued, whereas if the price of gold were to decline by $150 per ounce to $1100 per ounce, gold stocks would only be 15% overvalued based on the current trading prices.

Larger capitalization companies in the sector are currently more highly valued than their smaller peers, as the market pays up for liquidity. We believe that eventually value will prevail.

In the past, the largest companies have made dilutive acquisitions and built technically difficult projects in order to maintain their production profiles. In our opinion these actions contributed to large company's significant relative underperformance over the past decade.

Evidence of this dynamic amongst large gold miners is the significant underperformance of the Van Eck Gold Miners ETF, a market cap weighted passively managed ETF.

At Gabelli, we value gold mining companies based on our assessment of the quality of their assets and managements, relative to their trading valuations. Companies with good assets can produce gold at low unit costs, generating cash flow in almost any gold price environment.

A good management will know how to effectively allocate this cash. Owning companies which fit these criteria are core to our investment process at Gabelli.

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