Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Is It Time to Load up on Gold Stocks?

Commodities / Gold & Silver Stocks Oct 14, 2011 - 01:47 PM GMT

By: Jeff_Clark

Commodities

Best Financial Markets Analysis ArticleJeff Clark, Casey Research writes: By almost any measure, gold stocks are undervalued. Should we load up?

After completing my research on this question, I’m convinced more than ever that we at Casey Research are in the right place. See if you agree…


Let’s first get a handle on the degree of undervaluation. The more undervalued, the lower the buying risk. A fairly valued stock, on the other hand, requires added caution.

Gold accelerated higher last month, peaking around $1,900/ounce, while gold stocks lagged. Here’s a chart of the HUI-to-gold ratio (HGR). In a rising gold environment, a climbing HGR indicates that gold stocks are outperforming the metal; a falling HGR means they’re trailing gold.

Today’s 0.33 HGR means gold stocks as a group have not been this cheap, relative to their underlying metal, since January 2010. And a lower ratio hasn’t been seen since February 2009, when recovering from the 2008 global meltdown.

Also consider that the GDX (Gold Miners ETF) is about the same price as last December, while gold is up 30%.

I think there’s a more compelling situation that demonstrates the undervalued nature of gold stocks. It’s hard to read a mining company’s quarterly report these days without hearing about “growing margins.” The gold price has risen faster than operating costs across our industry and lifted profit margins of the better-run producers.

Higher margins are key to growing earnings and cash flow, which in turn lead to rising stock prices. Have gold mining equities kept pace with ever-increasing margins?

 

Gold mining companies are earning record margins, averaging a whopping $1,268 per ounce last quarter. In both nominal dollars and percentage above costs, margins have never been this high for the gold producers. Stock prices, however, have not responded in similar fashion.

This is a potentially significant point, because margins of this magnitude will be ignored only so long. When the broader investing community begins to take notice, investors will snap up these highly profitable stocks and push prices higher. The “catch up” in gold stocks could be tremendous.

The conclusions from these data seem clear: Gold stocks, as a group, are undervalued. The incredible profit margins generated by our sector will attract investors – sooner or later. And picking the better stocks, like most of those in BIG GOLD, is more profitable than buying a gold stock fund.

We’re in the right place.

The question, of course, is timing. We don’t know when gold stocks will begin to catch up. And the data don’t suggest they must rise right now or that they’ve hit bottom. Contributing to their price weakness is concern that the recent surge in the gold price isn’t sustainable. I can also tell you that the “Casey consensus” sees the risk of another significant decline in the broader markets as a distinct possibility, and if one materializes, gold stocks could undergo a temporary swoon.

We’re convinced they’ll someday hit lofty levels, but for now we maintain the same refrain: keep one-third of assets in cash. This reduces risk and gives us a nice pile of funds to deploy during any selloffs.

In the big picture, gold has ratcheted steadily higher throughout the rallies and corrections, a trend we’re confident will continue for some time. As the price sets new highs and margins remain robust, our sector will attract more attention. We must patiently stay the course until those new realities begin to set in.

Make sure you have exposure to gold stocks, but it’s not yet time to jump in, yelling “Geronimo!”

[As fiat currencies accelerate their inevitable paths to eventual destruction, gold will ascend. How far and how fast remain to be seen, but you can get insights and actionable advice on gold and gold stocks – and much, much more – from the recently held Casey Research/Sprott Summit, When Money Dies. You can learn what legendary investors like Rick Rule and Doug Casey are doing and recommending… get invaluable insights from analysts including Adam Fergusson and Lew Rockwell… from audio recordings of the entire event that are available to order now.]

© 2011 Copyright Casey Research - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in