(Kitco News) – Even as gold prices approach the once-unthinkable $4,200 per ounce level, the yellow metal could rise much higher still – and there’s even more upside in the mining equities than in the metals themselves, according to Evy Hambro, global head of thematic and sector investing at BlackRock.
Hambro was asked whether he believes gold producers’ stocks – many of which have doubled in value this year – are now overvalued.
“Are gold companies earning a lot of money right now? Absolutely,” he told Bloomberg Television on Tuesday. “The margins are as fantastic as I've ever seen in my career. Is that a warning sign that the price is too high and maybe costs will catch up? Or are prices of gold still too low and they'll go higher from here?”
Hambro said that based on that metric alone, you would have to say that gold companies are probably overearning in terms of profitability right now, but that doesn’t mean that gold itself is overvalued. To determine that, you need to look at gold’s value relative to other assets and prices in real life.
“We've done this analysis,” he said. “If you want to go and buy a Big Mac, or burgers, or low-value goods, you can buy more of them today with gold than you could have done in the past. But if you want to go and buy a pretty standard item, say in the U.S., like a Ford F-150 pickup, you can't; you're buying less of that even at today's gold price. So gold has preserved its purchasing power for some items, it hasn't preserved its purchasing power for all items – like Manhattan property, the average property price in Manhattan, you can buy way less of that.”
“Has it kept up with everything? No,” he said. “So therefore, in that metric, excluding the first one, it's not overpriced because otherwise you can buy everything with less gold than you could have done in the past, so I think you've got to look at these different metrics to decide where the price is itself.”
Hambro added, however, that the momentum of the current trend is also very important. “Maybe you have some speculators riding on the journey in the interim, causing volatility like we've seen today,” he said. “And maybe some of this physical leasing is part of that, but actually the trend is probably your friend in this environment.”
“If we are going in this direction […] where could it go to from here?” he said. “It could go a lot higher, if we are actually repricing paper currency relative to real assets. And if there's an issue around people believing in it, then this currency aversion trade, it could last a while.”
Hambro was also asked about the squeeze on physical silver supplies in the London market.
“Silver and gold are very different, he replied. “Silver's an industrial commodity, solar panels and so on. Gold's a monetary commodity, so they have very different dynamics that sit behind them. You look at the silver market today, there's something going on in the lease market. There's a shortage somewhere; someone's paying to get a hold of it, to meet a commitment, that's all that is. It doesn't mean that the price is too high or too low where it is right now.”
Hambro said that what he’s most excited about is the profitability of the underlying mining companies, which is what BlackRock invests in – and even after their dramatic gains, he still sees enormous value.
“At these prices, these companies are earning enormous margins, absolutely fabulous margins that are priced into the equities,” he said. “And you might say, ‘Oh my God, the stocks are up a hundred percent this year! How could they possibly be cheap?’ They're staggering. They've never been cheaper than they are right now. And we're starting to see the market catch up with that trade.”
Hambro said that the average long-term gold price that people are using in their models to value the miners was between $2,200 and $2,400 per ounce.
“That's a big discount to today's spot price,” he said. “That's like a 50% discount to the futures curve. That's a massive difference. The prices are now starting to be upgraded. We've seen some of these sell-side analysts come out and say, ‘Long-term pricing should be $2,800, $3000.’ That's still a big discount to spot and a massive discount to the forward curve.”
“When you look at all this together and you see what's priced into the equities, what's priced in is a massive retracement from today's prices,” he added. “And if that doesn't happen for 12, 18 months, two years, these companies will way overearn relative to expectations.”
Hambro was also challenged on whether this is just another cyclical peak in the gold market, and prices would come crashing back down as they had in the past.
“I think what we're in right now, it's probably bigger than a cycle,” he said. “Because we've got this enormous trend that's been with us now since the 1950s, the overprinting of paper currency, and this growing social liability. It's so hard to break away from that. Eventually, these things get to tipping points, and when you get to a tipping point, then things change. And maybe we're seeing a change in some of these real assets.”
Spot gold continues to rise further above the $4,100 per ounce level on Tuesday after setting a fresh all-time high of $4,179.93 just before 1:30 am EDT.
Spot gold last traded at $4,132.39 for a gain of 0.54% on the session.
