The Price of Gold
As we remarked in our previous blog, the commodity ‘gold’ keeps rising and setting new price heights. However, the trading value of companies that mine, process or search for this precious metal have stagnated or actually fallen.
If one considers that the price of the metal has doubled or tripled or quadrupled, depending on what period is being measured, then since gold shares should have a multiplier effect based on this, the trading value of shares of gold companies should have at least or tripled or quadrupled. However, the opposite has happened.
An explanation of factors that caused this phenomenon is in a previous blog. Some metrics and measurements comparisons follow which give some insight.
The Gold Index
The Gold Equity Leverage Index (GELX§) shows that the value of shares trading on public markets is wildly out of normal sync with the price of gold. This could be interpreted as meaning that gold stocks are very cheap compared with the gold price.
Another interpretation is that the price of gold is dangerously over-valued and gold equities are providing an early warning. It is not clear which meaning can be ascribed to this phenomenon. The more important question to ask is why the market seems to have abandoned this correlation between gold stocks and the metal they mine.
Shares of mining companies are trading at a valuation slightly above $500 per ounce of proven and probable reserves, and nearly $8,000 per ounce of annual production. That’s not out of whack by historical standards, and it shows stock prices trading at a steep discount to their Implied Reserve Valuations (IRV); currently around 68% of the total IRV per share.
The gold sector is barely trading above levels it raced to in mid-2002 as the world woke up to the nascent bullion bull market.
A Historical Comparison of Gold to Gold Stocks
After a period of under-performance ending October 2008, the miners outperformed bullion for about 12 months before drifting lower until January 2010. The curve for mining stocks then turned upwards and led the metal higher, until more recently.
The Gold Miners Bullish Percent Index (BPGDM) shows almost 60% of the 32 stocks in the Gold Miners Index are now in point and figure uptrends.
The latest upturn this year similarly appears to be signaling better tidings for gold and silver shares.
What All of This Means
As can be seen, there are numerous indicators and measurements of comparison between gold and the value of publicly traded shares of gold companies. Our own opinion is that the price of the commodity has not yet reached its inflation adjusted high that it reached almost 3 decades ago. But we again reiterate that this is not terribly important.
Rather than giving importance to our own conclusions on this matter, let us focus on how to invest and how to increase your wealth. Ignore the headlines in the newspaper that scream how gold reached a new high. Whether gold went up a few dollars or dropped a few dollars really doesn’t affect very much.
If you are a true gold bug, and you buy and hold pure gold, these fluctuations do mean something to you. But in spite of the entire outcry, there are very few investors that do this. Have a look at previous blogs for a discussion of who and of why few people buy pure gold.
What to Buy
CymorFund believes in buying junior resource stocks with true and massive upward potential. Of the thousands of junior resource stocks available, only a few attain substantial upward price growth. Buying junior resource stocks on tips and third party information is worse than going to the casino. Everyone boasts about how much they won at the casino, yet for some reason, the casinos make a lot of money. Someone must be losing.
It is the same with junior stocks. You always hear about the big winner, but you never hear about the rest which were losers.
In order to be in this market, you have to have direct contact with the companies themselves, with the people that control and operate these companies, and with the geo’s and other advisers to these companies.
If these criteria are met, there is no better place to be, no safer place to be, and no more rewarding place to invest.
