As any good contrarian investor will tell you, once something is being talked about in the mainstream press, and being tipped by your taxi driver, it’s time to sell. In some instances, the magazine cover is the most recognised way to tell if a concept, idea or person has gone mainstream. Remember the famous Business Week 1979 cover, “The Death of Equities”? That is a textbook case of the media getting it wrong. The Dow Jones Industrial Average was at 800 back then. This week, even after all the recent turmoil, it closed at over 11,500.
However, with the advent of keyword searches and proprietary databases, we can look at the historical significance of all mentions of gold.
In the chart below we see, on a 10-year basis, the number of times that gold is mentioned in Barron’s from May 1921 until August 2011. For reasons that shall be explained, the decades of the 1930s and 1980s were periods when the number of gold mentions peaked.
The impact of England’s suspension of the gold standard led to a domino effect of countries abandoning the gold standard. Denmark, Norway, and Sweden abandoned the standard by the end of the same month. In October 1931, Finland was next to go off the gold standard. Those that remained on the gold standard in Europe suffered huge losses due to the devaluation of their large holdings of British pounds in their treasury. The belief at the time was that the currency would always be backed by the set price of gold.
In the chart below, we observed that a significant drop-off in mentions of gold after 1987 may have to do with the fact that gold stocks declined equally as much as the Dow in the same period of time. Since the decline in gold stocks couldn’t offset the losses of stocks as anticipated, anyone who would have claimed that gold stocks were a refuge during a declining market had all the evidence to demonstrate that such a notion was foolhardy.
Gold stocks are as cheap as they have been in a decade. The chart shows the price-to-EBITDA ratio of the XAU Index of stocks, both in absolute terms and in comparison to the price-to-EBITDA ratio of the S&P 500 Index. This ratio is a measure of price-to-cash-flow and tends to illustrate valuation more accurately than the more familiar price-to-earnings (PE) ratio.
In absolute terms the price-to-EBITDA of the XAU Index is currently around 7.5 times, which is only about 10% higher than the price-to- EBITDA of the S&P 500 Index. Both of these metrics are as low as they have been in a decade.
Which gold stocks do you own? Will stocks continue to be a good investment? Leave your comments below.