Gold..correction, expected and normal..

Investors often ask “why do gold stocks often move at a much higher rate on a percentage basis than the price of gold itself. The fact is that Gold stocks can give investors much greater upside “leverage” over the price of gold bullion.

For example, if the price of Gold moves from $1200 to $1400, the return is approximately 16%..Not bad! But with the same $200 increase in gold a $4 gold stock can rise to $12 or more, that is a return of 100% to 200% and often it is much more. In a small cap “junior” we can often see 1000% to 1500% moves up. 

That enormous difference in the returns is the reason why successful gold investors buy the gold stocks instead of the actual gold bullion (or gold ETF’s). Yes, that is the primary reason that makes many of the gold stocks so attractive when the price of Gold bullion is rising.

                                           Here’s an example of how it works…

Producing gold mining companies generally have a fixed cost to produce (the all-in cost). It doesn’t matter if gold is selling at $900 or $1400 or at $1500 an ounce… the mining company’s costs generally stay the same.

Now if a mining company is producing gold at $1200 an ounce… and the gold price is $1300 an ounce… the company makes a profit of $100 an ounce…..But if the price of gold climbs to $1500, the company  will make a $300 profit per ounce. That’s a huge 200% jump in profits for the mining company, even though the gold itself went up only 25%.

                                               The Math is easy to understand

For example…Suppose that “XYZ Mining Company” has 100,000,000 shares outstanding. Then suppose that XYZ Mining produces 100,000 ounces of gold at an “all in cost” (total cost) of $1450 with gold selling at $1500. That’s a $50 per ounce profit.

So they are selling 100,000 ounces and making $50 per ounce for a $5,000,000 profit. That would be a .05 cents per share profit. (that is the $5,000,000 profit divided by 100,000,000 shares). If the XYZ Mining is selling at .50 cents per share, it would be selling at ten times earnings per share.

But suppose that the gold price rises to $1600 with the 100,000 ounces of production; that increase brings the profit to $150 per ounce- or .15 cents per share. That could bring the price of the XYZ stock to $2 to $3 dollars per share or more if the  company can increase their resources.

The leverage is enormous…so pay attention.

From Canadianmineanalysis.com

Points to consider in a looming positive gold market

Technical analysis (charts) suggests that a retracement back to $1380- $1400 would be completely normal and would still lead to our expectation of significantly higher prices. Such a decline creates opportunities for value oriented gold investors in many but not all precious metals stocks.

The US brokerage industry does not want a bull market in gold to occur as it indicates a major bear market for the large industrial stock market such as the Dow Industrials. A bear market brings with it huge losses of brokerage industry profitability and large declines for most stocks.

The price of Gold bullion has been regularly and visibly manipulated for several years. We have seen sales of paper gold and not true gold bullion sold during periods of low volume activity to create the illusion of gold being “dumped” and offering very little potential for capital gains. Simply stated, it is a ruse and a deception-nothing less.

During declines today gold stocks suffer much larger declines that they did in the past. Yes, and much more harsh! We no longer see the market makers, also known as specialists, holding large inventories in their stocks during declines to the same extent that they did in the past.

Psychologically, most investors cannot tolerate the enormous percentage declines gold stocks and particularly Juniors suffer during declines and bear markets. The most successful investors in precious metal stocks take advantage and dollar cost average during declines. The vast majority of investors cannot bring themselves to do that and that is why so few see substantial capital gains in gold stocks. They cannot and will not invest at price bottoms. Human nature does not change!

Finally, when and if an investor discovers an exceptionally undervalued precious metals and/or commodities stock, THAT INVESTOR SHOULD NOT SHARE IT WITH OTHER INVESTORS. TODAY’S MARKET DOES NOT OFFER ADEQUATE LIQUIDITY AND ONE DOES NOT NEED COMPETITION WHILE BUYING OR SELLING ……