Furthermore, we compiled information on mutual fund flows to get a sense for the average retail investorās appetite for gold equity investments (Chart 2). We found very familiar results in this area as well: compared to the $2.5 trillion dollars that was invested in US mutual funds since 2000, precious metal equity funds have seen a mere $12 billion in inflows. If there is a bubble in gold investments, the average retail investor hasnāt participated in it.
To truly gauge the level of exuberance (or lack thereof) in todayās gold market, itās beneficial to review equity valuations, since they provide an excellent lens into investor sentiment for an asset class. Certainly if a bubble was forming in gold, it would likely rear its head in the stock market, where speculative manias have been fleecing āgreater foolsā for centuries. The best gold index to review for valuation is the Amex Gold Bugs Index (HUI), which has returned a stunning 674% since 2000. It is certainly an index that could be mistaken for a bubble based on its incredible performanceā¦ until one considers its relative valuation. In Chart 3 we present a time series chart comparing the price-to-EBITDA of the HUI vs. that of the Nasdaq Composite since 1998. Price-to-EBITDA is a valuation metric that compares a companyās stock price to its profits before accounting for taxes, interest payments, and non-cash charges like depreciation and amortization. It is similar to the ubiquitous price-to-earnings (P/E) multiple but allows for a comparison across periods where net earnings are negative and P/E ratioās incalculable.
Looking at the price-to-EBITDA multiple for the HUI Index we see absolutely no evidence of a frothy market for gold stocks. At the current level of 13 times EBITDA, the HUI is actually trading below its 15-year average of 14 times. Moreover, valuations for gold stocks are currently one-third of the levels reached by the Nasdaq in late 1999. There simply isnāt any evidence of excessive valuations in gold stocks, which is most certainly where we would expect the excesses to be most apparent.
Based on our findings, this notion of a gold bubble is patently false. The current investment interest in gold relative to other financial assets remains surprisingly low - about where it was two decades ago. Moreover, the modest valuations of gold equities highlight the absence of unbridled investor enthusiasm for gold investments. The fact is, despite all this talk about the gold bubble, the capital flows into gold vis-Ć -vis other financial assets have simply not been large enough to indicate any speculative mania. Investors can rest assured that they are not participating in any speculative bubble by owning gold. They are merely protecting their wealth.
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1 SAM estimate based on data obtained from McKinsey & Co., IMF, CPM Group, Thomson Reuters, BIS
2 "CPM Gold Yearbook 2010" CPM Group (March 2010)
3 SAM estimate based on data obtained from McKinsey & Co., IMF, CPM Group, Thomson Reuters, BIS
4 Larmer, Brook. "The Real Price of Gold" National Geographic Magazine. (January 2009) Retrieved on March 7, 2011 from: http://ngm.nationalgeographic.com/print/2009/01/gold/larmer-text
5 "Mineral Commodity Summaries 2011" US Geological Survey (January 2011). Retrieved March 7, 2011 from: http://minerals.usgs.gov/minerals/pubs/mcs/2011/mcs2011.pdf
6 RBC Capital Markets, Dealogic
7 Ibid. 
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