Gold stocks staged spring and summer rallies this year, but haven’t able to sustain the momentum. Many have sold off sharply in recent weeks, along with gold. That makes this a good time to examine the book value of gold equities; are they objectively cheap now, or not?

By way of reminder, a price-to-book-value ratio (P/BV) shows the stock price in relation to the company’s book value, which is the theoretical value of a company’s assets minus liabilities. A stock is considered cheap when it’s trading at a historically low P/BV, and undervalued when it’s trading below book value. From the perspective of an investor, low price-to-book multiples imply opportunity and a margin of safety from potential declines in price.

We analyzed the book values of all publicly traded primary gold producers with a market cap of $1 billion or more. The final list comprised 32 companies. We then charted book values from January 2, 2007 through last Thursday, October 15. Here’s what we found.

At the current 1.20 times book value, gold stocks aren’t as cheap as they were when we ran the numbers in June, 2013, successfully pinpointing the all-time low of 0.91 (the turning point before the period in gray). Of course, that P/BV is hard to beat: it was one of the lowest values ever. And while the stocks not quite as cheap now, the valuation multiple still lingers close to its historical bottom. Remember, we’re talking about senior mining companies here—producers with real assets and cash flow selling for close to their book values.

In short, yes, gold stocks are objectively selling cheaply.

The juniors, of course, have been hit harder. It’s hard to put a meaningful book value on many of these “burning matches” with little more than hopes and geologists’ dreams, but valuations on many are scraping the bottom, making them even better bargains, albeit substantially riskier ones.

What does this mean for us investors?

It’s no surprise to see that every contraction in the ratio was followed by a major rally. In other words, the cure for low prices is low prices:

• The August, 2007 bottom (2.2) and the momentary downtrend that preceded it were quickly erased by a swift price rally leading to a January, 2008 peak (3.8).
• The bull also made a comeback in 2009-2010, fighting its way up out of what seemed at the time to be the deepest hole (1.04) in October, 2008.

Stocks have been on a long slide since the ratio last peaked at 3.24 in October, 2010, with the downturn in 2013 pushing multiples to previously unseen lows.

No one—us included—has a crystal ball, and so it’s impossible to tell if the bottom is behind us. We can, however, gauge with certainty when an asset is cheap—and cash-generating companies selling for little more than book value are extraordinary values for big-picture investors.

Now let’s see how these valuations look against the S&P 500.

As the increasingly volatile stock markets bounced back higher today,  JP Morgan experienced one of the largest withdrawals of gold from its inventories this year.  In just one day, a stunning 321,500 oz of gold (10 metric tons) were removed from JP Morgan’s Eligible inventories.

Click Chart For Larger Image

Total gold inventories at JP Morgan fell 33% from 983,693 oz yesterday, to 662,193 today.  Of course, this had to come from JP Morgan’s Eligible inventories, because there are only 176,436 oz of gold in their Registered inventories.

You will notice, that the amount is exactly 321,500 oz (10 metric tons) to the TEE… and as Harvey Organ and Bill Holter have commented, it’s extremely rare for a gold bar or series of gold bars to equal exactly 10 metric tons.  Instead, we should see a fraction of an amount shown as an example in the MANFRA, TORDELLA & BROOKES gold transfer of 29,752.630 oz from the Registered category to Eligible.

Looks like this transfer was LEGIT as we can see the fraction of 0.630 oz shown in the transfer.  I gather JP MORGAN feels that it doesn’t need to be bothered with accounting for these silly fractions, when they have to deal with much larger numbers such as the $70 trillion of Derivatives on their balance sheet.

It will be interesting to see if this 10 metric ton gold withdrawal from JP Morgan becomes an entry in one of the other Bank’s vaults in the next day or so.  Or maybe, it’s on its way to CHINA or INDIA.  Either way… just another interesting data point taking place as the broader stock markets continue to CONVULSE up and down like someone suffering from a HEART-ATTACK.

Please check back for new articles and updates at the SRSrocco Report.

Przemyslaw has covered the balance of his profitable long trading position this morning. It should be noted that prior to this long position Przemyslaw covered his profitable short gold short positions on Sep. 25. Here is a summary why he has covered the other half of his long position today:

“It’s tempting to try to ride this rally until it’s definitely over and exit very close to the top, but let’s forget about this for a minute and consider if we would open a long position today if we hadn’t had one already, the answer is “no”. It’s too risky given the proximity of the resistance levels in gold and silver (not to mention silver’s turning point) and the underperforming mining stock sector.” Yesterday’s article below – Money Talks Editor

Briefly: In our opinion speculative long positions (half) in gold, silver and mining stocks are justified from the risk/reward perspective.

Yesterday, gold closed higher than it did in the previous several weeks, which seems like a very bullish development for the entire precious metals market until one realizes that miners are still close to their most recent lows.

In short, in our opinion, the answer to the title question is that miners could rally some more in the short term, but we don’t expect the rally to be significant. We expect to see significant rallies after the final bottom is reached (in a few weeks – months), but not before that – at least not based on the information that we have available today. Furthermore, it seems that the next local top will be reached shortly, but that it’s not in just yet.

Why? The USD Index is likely not done declining and the long-term resistance lines in gold have not been reached. What we wrote about these markets yesterday and on Friday remains up-to-date. Still, we would like to show you the latest short-term USD chart as we have added a target area to it (charts courtesy of http://stockcharts.com).

The target area is relatively close in terms of both time and price. Most of the decline is probably behind us. We have previously written that we expect the USD Index to correct to the 38.2% Fibonacci retracement level and the biggest unknown is what the retracement should be based on – the May-Oct. or Jul.-Oct. rally. The former seems a bit more likely because the 38.2% based on the May-Oct. rally coincides with the 50-day moving average (blue line on the

above chart).

Click Chart for Larger Image

As we have mentioned earlier, gold closed higher once again, which allowed for closing part of the long positions with greater profit yesterday.

As a reminder, we took previous profits off the table by closing short positions on Sep. 25 and we went long with half of the regular position on the same day (gold closed at $1,222.50, but the intra-day low was $1,206.60 and we changed the positions well before the markets closed). On Sep. 30 (when silver was below $17 and gold closed at $1,209.10) we wrote about doubling the long positions.

Yesterday’s move, however, materialized on relatively low volume. It was lowest in a few weeks, so the rally itself was not bullish. The price-volume combination suggests that the rally is running out of steam and the local top is close. This is in tune with what we can infer from the USD Index charts and from the long-term gold chart.

The USD Index is not the only thing that moves in cycles. The silver market has a cyclical nature as well. The white metal is likely to turn around in the next several days, and the most recent short-term move has been up. Consequently, we are quite likely to see a local top relatively soon.

The declining resistance line is now relatively close – about $0.27 away and more or less at the previous intra-day Oct high. Consequently, we could see the local top more or less at this price level. It seems that it would quite likely coincide with gold moving to its target price.

Now, in the case of mining stocks, what we see on the above chart per se is less important than what we learn when we compare it with the chart of gold. The above chart tells us that miners rallied yesterday, but the miners-gold link tells us that miners are still weak. This is particularly discouraging because the general stock market moved higher once again yesterday. In other words, we saw Friday’s bearish signal once again – miners did not soar or catch up with gold, even though they “should have”.

Overall, we can summarize the situation in gold, silver and mining stocks in a way that is similar to what we wrote yesterday. However, before we write the final paragraph, we would like to reply to a few questions that we received yesterday.

The first one is “how will you know we reach the final bottom for precious metals and the mining stocks? Will $1,000 and $14 be the final one or could we see a rebound and another plunge lower?” Our reply is similar to what we have written previously. We will be looking for confirmations at these levels. Significant support levels in gold and silver being reached – this is one thing that is likely to be seen at the final bottom, but there are also other things that we would like to see:

– We would like to see USD Index at a major resistance level.

– We would like to see the gold stocks to gold ratio plunge (but we would like gold stocks to show strength after a while, thus refusing to follow gold’s declines).

– We would like to see the silver to gold ratio plunge very visibly (to the point that it’s scary and most investors/traders panic).

– We would like to see websites dedicated to gold freeze for a while when people are so interested in the volatile downswing and keep refreshing these websites for latest prices (did you know that something like that occurred in 2011 right before the final top?).

– We would like to see a very bearish (preferably hateful or otherwise emotional) article on gold in the mainstream media.

– We would like our non-investing friends to call us asking what’s going on with gold as they’ve heard that it has declined so badly.

– We will see other sings that investors and traders sentiment toward gold is very bad.

In other words, we will be looking for confirmations that the bottom is in. The price itself is not enough. At this time it seems that the $1,000 – $1,100 area for gold, $14 – $16 for silver and 150 or so for the HUI Index will stop the decline, but there are no sure bets in any market. We will keep monitoring the situation and report to you accordingly.

The second question that we received is if we will let you know when we think the final bottom is in and if we will plan to take advantage of it using ETFs or quality mining stocks. The answer to the first questions is “yes”. In more detail, we will let you know when we think that the situation looks favorable enough to get back into the precious metals market with the long-term investment capital and when to open speculative long positions. As far as ETFs / mining stocks are concerned, we will quite likely use both.

We will most likely use ETFs / ETNs for speculation in the case of gold and silver (trading capital) and we will use quality mining stocks for investment purposes (individual mining stocks are also useful in the case of speculative trades).

In general – as you have read in the bottom part of each recent alert – we are now out of the precious metals market with the long-term investment capital. The gold & silver portfolio report shows you how the portfolio looked (in case of 3 sample investors: Eric, Jill, and John) before we exited the long-term positions. When we come back to the precious metals market, you can expect a similar structure. We will probably move more into platinum than we will into gold, though.

The third question was what stocks we prefer to buy when we think the bottom is in. The short answer is – the ones with the best outlook. How do we determine that? Using the Golden StockPicker and Silver StockPicker tools. We created these tools a few years ago based on our experience and insights and we have tested their performance several months ago – they have proven to be very helpful in case of both: selecting stocks for speculative trades, and in case of long-term investments.

Each day these tools create rankings of stocks based on their recent performance relative to gold. If they don’t give you the big bang for your gold-and-silver-exposure-seeking buck, stocks rank lower. If they do, and they provide leverage, they rank higher.

There are multiple ways to use these tools, but in short, for long-term investment purposes, the aim – in most cases – is to buy the best 5 stocks and then rebalance them (every 20 trading days in the case of silver stocks and every 50 trading days in the case of gold stocks). This approach created a lot of value as compared to the simple buy-and-hold approach. We conducted  very thorough research on rebalancing mining stocks (the most comprehensive there is, to our knowledge) and you can read the corresponding report in our reports section. The report also features a few approaches regarding speculative purposes. In most cases, selecting top 2 mining stocks seems justified. For instance, take the current/last trade. We wanted to provide you with an example of how the Golden StockPicker works so we saved its results that were based on the Oct. 3 session.

Here’s the input screen:

Here’s the output screen (top 5 stocks):

s

The top 2 gold stocks were: GOLD and RGLD. The above readings were available on Oct. 6 so we will take Oct. 6 and yesterday’s (Oct. 20) closing prices into account. The HUI Index moved from 193.49 to 191.16 (thus moving lower by about 1.2%). At the same time, GOLD moved from $67.23 to $68.55 (thus moving about 2% higher) and RGLD moved from $65.36 to $68.04 (thus moving about 4.1% higher).

Of course, these tools are no crystal balls and they will not select top performers each and every time, but – as we have shown in the rebalancing report – they are very likely to improve the results that one gets on the mining stock trades.

To summarize, when the risk/reward ratio is favorable enough to get back in the precious metals market with the long-term investment capital, Golden StockPicker and Silver StockPicker will provide the mining stock rankings.

Summing up, while the situation in USD Index and in gold and silver suggests higher prices in the short term (not much higher, though), the bearish signal from the mining stocks makes the overall short-term outlook for the precious metals sector less bullish than was the case previously.

What’s next? We’ll be paying close attention to the events as they unfold and will let you – our subscribers – know when we think further adjustments (either taking the rest of the profits off the table, or adding to / changing positions) are justified from the risk/reward point of view.

To summarize:

Trading capital (our opinion):

It seems that having speculative (half) long positions in gold, silver and mining stocks is a good idea:

Gold: stop-loss: $1,172, exit order: $1,257, stop loss for the UGLD ETF $11.29, exit order for the UGLD ETF $13.75

Silver: stop-loss: $16.47, exit order: $18.07, stop loss for USLV ETF $23.94, initial target price for the USLV ETF $31.73

Mining stocks (price levels for the GDX ETF): stop-loss: $19.94, exit order: $23.37, stop loss for the NUGT ETF $18.25, initial target price for the NUGT ETF $28.99,

In case one wants to bet on higher junior mining stock ETFs, here are the stop-loss details and initial target prices:

GDXJ stop-loss: $28.40, exit order: $37.14

JNUG stop-loss: $6.19, exit order: $16.34

Long-term capital (our opinion): No positions

Insurance capital (our opinion): Full position

Thank you.

Przemyslaw Radomski, CFA

Founder, Editor-in-chief

Tools for Effective Gold & Silver Investments – SunshineProfits.com

Tools für Effektives Gold- und Silber-Investment – SunshineProfits.DE

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Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.