Gold-Stock Panic Levels
By: Adam Hamilton
Friday, 23 March 2012
The beleaguered gold stocks have spiraled lower this month, heaping misery on poor fools like me naive enough to invest in them. Dwindling interest and capital has left this realm a desolate wasteland, I’ve rarely seen anything so deeply out of favor. In fact, relative to gold the gold stocks are now back down to levels only seen briefly during 2008’s epic stock panic! Are they dying, gasping their last breath?
This question has enormous implications for speculators and investors. If gold stocks are doomed to never rally again, we ought to cut our losses and move on. But if this embattled sector is likely to return to favor in the near future, then its current extreme malaise is an incredible contrarian buying opportunity. The more any sector is loathed and forgotten, the more potential its stock prices have for massive rallies.
As I ponder this vexing puzzle, my mind keeps returning to how the stock markets in general work. Any stock is ultimately a fractional share of its underlying company’s future profits stream. If those profits are high or rising relative to the stock price, investors bid up the stock to reflect its underlying economic reality. Over the long term, the markets eventually price all stocks to fairly represent their profits.
And despite the many challenges of mining gold, profits are rising dramatically. My business partner Scott Wright recently updated his fascinating research thread proving this. By painstakingly analyzing detailed data from individual major gold miners collectively representing nearly half of global mined production, it is apparent gold-mining profits are amazing. Last year the average gross margin of this elite group ran $915 per ounce, or an astounding 58%! Gold miners are making money hand over fist.