Tuesday, September 20, 2011

Gold Stocks - Moving on Up


As I pointed out in my first blog post a few weeks ago (quoting John Hathaway of the Tocqueville Gold Fund), "gold stocks represent extraordinary value and extraordinary opportunity right now." In the last 6 weeks, $HUI (the AMEX Gold Bugs Index) is up 20% and is now flirting with hitting new highs. Fundamentally gold stocks are still cheap and have plenty more room to go, according to Chris Mayer, editor of Capital and Crisis.

Chris Mayer: Gold Stocks are fundamentally cheap based on cash flow. One of the most remarkably chart I've come across is the nearby one showing the collapse in the cash flow multiples of gold stocks. They've gone from 20 times in 2008 to about 10 times this August!
The last time gold stocks got this cheap, on this basis, was back in 1979, when the group touched 8.5 times cash flow. This preceded a parabolic move in gold stocks in which they ultimately ran up four-fold. The 1970s is an interesting period to look at because gold stocks also lagged the price of the metal all the way up. 

Check out the rest of the Chris Mayer's article which includes 3 reasons why the gold stocks have underperformed the gold price so far. He also provides a chart that shows how gold stocks performed (very well!) shortly after the last time gold stocks multiples were this cheap in the 1970's.


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