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Think Gold Slump Is Bad? Bullion Stocks Fared Way Worse

Wednesday, 13 Mar 2013 | 1:56 AM ET
Source: World Gold Council

While the "great rotation" into riskier assets has triggered a 4.3 percent fall in the price of gold since the start of the year, this is just a fraction of the losses seen in the shares of gold miners, which have fallen 15 percent on average over the same period.

Worries over the outlook for the precious metal and declining profitability of the miners have led to a continued selloff in their shares, which have struggled to find favor with investors over the past year. As a result, gold miners are now trading at their cheapest level in 25 years relative to the physical metal, according to Point View Wealth Management.

Major miners including U.S. listed Newmont Mining and Barrick Gold are trading at a price to earnings ratio of 10.5 and 7.6, respectively.

For gold bugs positive on the longer-term outlook for the precious metal, this offers an attractive entry point, market participants told CNBC.

"It's a no brainer in my view - if you like gold, play it through the companies. Even if the gold price doesn't head north, just goes sideways, I think you can make good money and make good dividends with gold stocks," David Dietze, president & chief investment strategist at Point View Wealth Management told CNBC on Wednesday.

(Read More: GoldWarnings Surge as Banks Jump Off Bandwagon)

He argues that gold miners are becoming more disciplined with their capital expenditure, which will help their profitability that has been under severe pressure as a result of rapidly escalating operational costs.

"There's no question about it - these gold miners were undisciplined with expansion plans thinking gold prices would go to the moon. Now, they are canceling plans for expansion, closing marginal [shafts], which reduces costs and adds to profits," Dietze said, adding that this will reduce future supply and ultimately enhance the price of the commodity.

David Lennox, resources analyst at Fat Prophets, agreed, noting that the "significant rise in cost of extracting gold seems to have plateaued and is trending down."

Another major point of attraction for the stocks is the dividends they offer, according to Dietze of Point View Wealth Management.

Newmont Mining and Barrick Gold, which are his top stock picks, offer dividends of 3.6 percent and 2.8 percent, respectively, which he notes could rise as gold prices recover.

"That's double the yield on the 10-year Treasury - and if inflation turns ugly, the stocks offer wonderful protection," he said.

In spite of this, Warren Gilman, chairman and CEO of CEF Holdings, says gold miners are a "terrible place to be."

"As the Dow hits new highs every day, there are a lot of other opportunities to make money. The gold business has proven to be a horrible place to invest - miners have been horrid managers of capital," he said, adding that until they have convincingly demonstrated an ability to control costs, he would not recommend investing in them.

Gold Price Outlook

Dietze expects the precious metal to cross $1,900 an ounce this year - around 20 percent higher than current levels - given inflation risks in the United States, the ongoing European debt crisis and a potential reversal in U.S. dollar strength in the coming months.

Spot gold rose to a 1-1/2-week high above $1,590 an ounce on Wednesday after Germany's central bank expressed concerns about the euro zone crisis and the European Central Bank's moves to stem it.

(Read More: Bracefor Big Drop If Gold Breaches This Level)

"If the dollar keeps rising, people like [Fed Chairman] Bernanke will worry about U.S. competitiveness and they will try to talk the dollar down, this would be a good point to get into gold," he said. A strong dollar generally means lower gold prices. When the dollar strengthens, gold futures, which are traded in dollars, become more expensive for investors who use other currencies.

Lennox of Fat Prophets said his annual target for the safe haven asset, which was set at the beginning of 2013, is $2,300-2,500. He said uncertainty surrounding the U.S. debt situation could lead to another bout of risk aversion this year, which would support buying of the precious metal.

Disclosure: Clients of Point View Wealth Management have holdings in Newmont Mining.

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  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.