The devaluation of gold equities as a result of the yellow metal's falling price has largely run its course, says JP Morgan Asset Management.

Despite a disappointing run for gold stocks since the beginning of 2011, Neil Gregson, lead manager of the JPM Global Natural Resources Fund, thinks it is too early to give up on such investments.

Gold is currently trading at just over $1,600/oz, way below the $1,900/oz peak seen in September last year. However, many gold mining companies are trading at valuations corresponding to a gold price as low as £1,200/oz, Gregson said.

“In reflecting on the derating of gold equities it is worth reviewing historic valuation levels,” he said. “In the 1960s and 1970s most of the listed gold equities were the South African producers and tended to be valued on dividend yields. In the 1980s an improvement in gold processing technology (heap leaching) allowed substantial growth in Australian and North American gold production.”

“The same period saw the launch and growth of a number of dedicated gold mining mutual funds,” he said. “Valuations increased as investors paid a growth multiple and a gold option premium for exposure to gold price movements. Direct investment in gold was either not allowed under investment guidelines or was not practical, gold ETFs did not even exist at that time.”

In that environment, valuations of gold mining companies skyrocketed during the 1990s. Today, gold invested in ETFs is worth around $140 billion and the price of the safe haven asset has also received substantial bullion support from central banks in recent years.

Earlier this week, BullionVault, a physical market for gold and silver investors, reported that its gold bullion holdings have smashed the 30-tonne mark for the first time – a figure which at current prices has a worth of over $1.5 billion and which the firm says outweighs that of many large countries’ central banks' reserves.

JP Morgan does not forecast a return to the highs of the 1990s, but all the same believes that gold stocks are a worthwhile investment: “In our view, gold equities are trading at depressed levels, the industry is recognising the importance of better capital discipline, cost control and paying increasing dividends to compete with gold ETFs,” Gregson said. “As such we believe investors should not give up on gold stocks.”