By MoneyMorning.com.au
Gold fell $32.50 in US dollars yesterday. (It’s still up 17% for the year. But down 14% from the $1895 high in August.) And the gold stocks followed it down.
We guess a question you might ask yourself now is: ‘What’s the upside for me as a gold investor?’
If the experts are calling for gold to get to US$2000… and gold is trading at US$1620… you’re looking at, what, a 23% gain? Is that enough to bring new gold buyers into the market? And if not, what does that mean for you? And what does it mean for gold stocks?
Most gold explorers had a terrible time in September. The junior gold miners ETF fell off a cliff on the 20th of September. This may be down to hedge fund activity in the sector.
In theory, a gold stock is worth the value of its future cashflow. So a stronger gold price should lift gold stocks (remember, gold is up 17% this year). That’s pretty much the pattern we’ve seen in the past.
But what has happened to gold stocks as gold made new highs every few months? Well… they fell…
Gold stocks normally amplify the gains from gold. If gold goes up 10%, then a good gold stock should go up 20%. So traders look for this ‘leverage’ to the gold price in gold stocks.
But the gold price (red line) has hugely outperformed gold stocks (blue line).
So, what does this mean for gold stocks now?
For one thing, wherever the price goes, gold stocks are still worth the price of their future cash flows. And as the gold price rises further, so should the stock’s value.
And that means with the gold price still high and gold stocks at a low relative price, current prices are incredible value to new investors.
Dr. Alex Cowie
Editor, Diggers & Drillers
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