Loading ...While gold stocks indeed should’ve been sold with gold weaker, the magnitude of selling they suffered was far beyond anything justifiable fundamentally. This ultimately culminated in the latest gold-stock capitulation where the HUI plunged to 11.3-year lows! Think about that a second. Gold stocks were just trading at prices not seen since July 2003. Pretty much the entire secular gold-stock bull had been fully erased.
That’s pretty crazy to contemplate. Between November 2000 and September 2011, the HUI rocketed an astounding 1664% higher during a period where the benchmark S&P 500 drifted 14% lower. Gold stocks were the best-performing sector in the world during their secular bull, earning fortunes for their investors and speculators including me and our newsletter subscribers. It was one of the greatest stealth bulls in history.
But as of last week, over 4/5ths of that bull run had vanished. And that entire not-widely-followed gold-stock bull was based on the massive fundamental boost to gold-mining profits that gold’s own secular bull created. So if the recent gold-stock price levels were righteous, gold too should have been pounded back down towards its mid-2003 levels. Where was gold trading back then? Merely right around $350!
Three-hundred-and-fifty-dollar gold, that’s incredible. I was trading gold stocks and writing newsletters back then too, building fortunes for contrarian investors brave enough to buy low. Believe me, this has never been an easy sector to own. It’s not only super-volatile and emotional, but gold and therefore gold stocks will always be hated by Wall Street because they compete with general stocks for scarce investment capital.
Do gold stocks deserve to trade today as if gold was at just $350? Heck no! Last week when gold stocks’ latest capitulation low was carved, the gold price was up near $1150. That was3.3x higher than the last time the gold stocks traded at recent levels! It makes no fundamental sense whatsoever for gold stocks to trade as if gold was at $350 when it was actually $1150. Their core fundamentals are now vastly better.
At my company Zeal, we’ve done and continue to do extensive and deep studies on gold miners as a sector. We are constantly looking at their profitability, cost profiles, operating cashflows, and a wide array of hard financial metrics. And despite major write-offs of gold projects forced by the past couple years’ extreme once-in-a-century gold-price anomaly, gold miners’ underlying fundamentals remain rock-solid.
This whole sector is truly in infinitely better financial shape than it was 11 years ago the last time the HUI traded at recent levels. And as gold inevitably mean reverts higher out of its own recent extreme lows, the current and future profitability for mining gold will soar. So it is extremely illogical, fundamentally absurd, for gold stocks to be priced as if gold was at $350 when it is actually $1150. This is confirmed the other way.
The recent extreme gold-futures selling hammered gold to a 4.5-year low, a far-shorter span than the 11.3-year HUI gulf. The last time gold traded in the $1140s in April 2010, the HUI was between 425 and 450. Without today’s unbridled explosion of fear, I strongly suspect that’s exactly where gold stocks would be trading again. HUI 400 or maybe even 350 could easily be considered righteous and rational, but 150? No way.
The awesome thing is such temporary emotional fictions created by extreme greed or fear soon pass. The collective herd emotions in the markets are finite, with extremes short-lived. Once everyone susceptible to being scared into selling low is already out, there are no more sellers. So soon the great sentiment pendulum starts slowly swinging back through its greed-fear arc towards the opposite end. Thus gold stocks soar