By Kejal Vyas
Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- Stocks of gold-mining companies have enjoyed solid gains as the metal breaches key resistance levels, but appreciation from here may be minimal.
With valuations on gold equities stretched above the historical average, market watchers see little support for the group, whose shares have surged along with other major developing world stocks.
Gold-mining companies, many of which are either based in or do their business in developing countries, are now trading at more than 27-times forward-looking earnings. That's a considerable premium for the group, which has traditionally traded with a P/E ratio in the low 20s, according to analysts at Thomas Weisel Partners.
"Many of these stocks are ferociously expensive," said Christopher Ecclestone, an equities strategist with Hallgarten & Co., who is establishing a Latin America hedge fund focusing on mining companies.
Now that gold prices have hovered around the psychologically important $1,000-per-ounce level, chart watchers say there may be room to run higher.
Typically, the gold market is hit with profit-taking when approaching $1,000, but not this time, said Trenton Kimminau, a broker with Global Futures Exchange & Trading.
Kimminau said he sees that upward trend continuing, especially since the weakening of the dollar doesn't look like it's about to end.
Despite that, Hallgarten's Ecclestone said he would rather invest directly in gold through the SPDR Gold Trust (GLD), because the higher risk and premium tied to mining stocks is no longer attractive.
To be sure, investors in gold stocks have been rewarded handsomely in the past year, supported by a weaker dollar and a recovery in metals across the board.
Peru's Compania de Minas Buenaventura SA (BVN) and South Africa's AngloGold Ashanti Ltd. (AU) have seen their shares jump 81% and 91%, respectively. Randgold Resources Ltd. (GOLD), which mines for gold in West Africa, has more than tripled from its October 2008 low.
These advances soar past the SPDR Gold Trust, which has gained 30% in the last 12 months.
Indeed, some miners offer a dividend but returns on them are less than 1% per year, at current prices.
"You're better off buying Treasurys," Ecclestone said.
Still, Thomas Winmill, portfolio manager at Midas Funds in New York, said mining stocks could stand to gain anywhere from 5% to 10% in what remains of the year.
He said demand for the precious metal looks to be holding up and said he takes comfort in moves by gold miners to unwind their hedge positions on the precious metal.
Late last week, Barrick Gold Corp. (ABX) became the latest to eliminate its hedges, following an industry-wide trend. That is seen by many as a testament to their bullishness on the metal.
Gains in gold prices would mean additional revenue for miners, some investors said, meaning that earnings projections could be revised higher and bring valuations back into check.
-By Kejal Vyas, Dow Jones Newswires; 212-416-2185; kejal.vyas@dowjones.com