Thursday, March 21, 2013

Barrick Gold (ABX) Is the Bottom In?

Those holding gold stocks recently may be understandably disappointed.  They are under performing both the metal and the broader stock market.  I have a close friend who invested in the Gold Miners ETF (GDX) in the fall, lost 21% of his investment, and sold half of his stake, locking in the 21% loss on that half.

That cautionary tale highlights a key point any investor should keep in mind.  Position sizing.  The short explanation?  Never put so much onto a single concentrated position that a large drop would keep you up at night.  Sure, GDX is in essence a fund, and offers diversification, but it's also totally concentrated in one small sector.

The real point of this post though, is to look at the value available in gold stocks (and specifically Barrick Gold) at today's prices.  Matt Badiali at Growth Stock Wire has some thoughts on that.
"But just how cheap are gold stocks getting? Let's use the world's largest gold miner, Barrick Gold (NYSE: ABX), as an example...

First, let's see how much gold Barrick has on the books. To do that, we'll use "tangible book value" (TBV). TBV is simply the value of a company's gold mines, excluding things like goodwill and patents. This is an important tool because it tells us if a company's assets "go on sale." That's the case with Barrick today...

Barrick's price-to-TBV ratio (its share price divided by its tangible book value) hit a high of 5.3 times in the first quarter of 2008. Its average price-to-TBV from January 2008 to today is 3.4 times. And the current value is 2.3 times.

That means Barrick's assets are trading at a 32% discount to their five-year average. And they're trading at a 57% discount to their 2008 high. Those are steep discounts. But the price of gold tells us Barrick's projects should be worth even more today..."
Is it time to put some money into Barrick?  Don't ask me.  I'm already in.

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