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Gold stocks are down between 20% and 30% over the past year yet, in that same timeframe, the price of the gold has risen. As a result, sentiment toward gold stocks is pitiful. Even diehard gold bugs are tired of losing money in gold stocks and have been dumping their shares in disgust. This article discusses 4 main reasons I can think of why gold stocks might be so cheap. Words: 444
So writes Tim Staermose (www.sovereignman.com) in edited excerpts from his original article* entitled Four reasons why gold stocks are so hated.
This article is presented compliments of www.munKNEE.com (Your Key to Making Money!) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.
Staermose goes on to say in further edited excerpts:
The 4 reasons are:
- Now…that the financial crisis is [supposedly] over, people expect the gold price to fall.
- The presence of…many paper gold…[and ETF products] provides a means for people to have gold exposure without having to buy mining stocks.
- Some investors may perceive that the increased cost of extracting gold is outpacing the price of gold, meaning that profit margins of gold mining companies may be deteriorating.
- The prospect of a deflationary credit crunch would eliminate the availability of project financing, putting new mines at risk, particularly among the smaller miners.
Let’s examine these in turn.
Reason 1 is unrealistic: Stocks are hitting 5-year highs, but the root causes of financial crisis, namely too much borrowing and spending, have not been addressed. There is more money and debt in existence now than ever in history. Central banks have created trillions of dollars out of thin air and debts have merely migrated from the private sector to public balance sheets. In our view, gold remains an EXCELLENT hedge against systemic risk in our view.
Reason number 2 is partly true: A lot of money that might have gone into gold mining stocks has instead gone into the many paper gold and ETF products that have proliferated in this bull market but with gold stocks now RELATIVELY cheaper against gold itself, a reversion to the mean seems a reasonable expectation.
Reasons 3 and 4 are possibilities: Mining costs are rising and a deflationary credit crunch could really affect production if mining companies lose their financing. Initially, this scenario would likely put downward pressure on both gold prices and the equity value of mining companies who would see their project financing opportunities diminish.
To me, the [above reasons why gold stocks might be so cheap] are among the chief risks we would be assuming by buying gold stocks over the long-term but I’m not suggesting this trade for the long-term….
My Suggestion On How To Profit From The Above Concerns
I’m suggesting that there’s money to be made buying a HATED sector of the stock market while it’s out of fashion and nobody wants it. Right now, this means gold stocks. More than likely sentiment will rebound, the crowd will come back, and we’ll be able to lock in short-term profits.
Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://www.sovereignman.com/finance/four-reasons-why-gold-stocks-are-so-hated-10782/ (Written by Tim Staermose; © Copyright 2012 Sovereign Man; All rights reserved )
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