Slash and Earn: The Gold Stock ParadoxSubmitted by barracuda_trader on Mon, 02/17/2014 - 16:12
Why Are Gold Stocks Doing So Well?
There are several reasons…
Bad news was priced in. Many analysts expected bad news from the producers, so Mr. Market was looking at other factors to determine if he should buy or sell.
Companies are leaner and meaner. It wasn't all bad news…
Many write-downs and impairment charges were one-time adjustments. Write-downs today can mean less depreciation expense tomorrow, which can add leverage to the upside when gold rises.
Most (though not all) companies have been able to reduce costs substantially.
A good number of companies are still increasing production, which we expect to translate into much higher share prices as gold rises.
The market clearly expects margins and bottom lines to materially improve due to the positive changes most management teams have been able to make.
Sentiment has shifted. A number of analysts have started to take notice of the deep valuations gold stocks offer. There's a sense among an increasing number of investors that the worst is over in the gold sector, and therefore that bargains had best be snapped up while they're still available.
The broader stock market is weak. There's an inverse relationship between gold and the S&P; more often than not, when one is weak, the other tends to be strong—and Wall Street has been weak.
Gold is rising. With each tick up in the gold price, producers become more attractive. Most investors know you can get leverage to the gold price through a gold stock, as has just been amply demonstrated in the last few weeks.
That said, gold stocks have been rising sharply since their December 31 lows—some charts have gone almost vertical—so don't be surprised if we see a pullback soon. But a larger shift in the gold market is under way; we're moving from a two-plus-year bear market to the beginnings of a new bull market—and that's when we stand to make the most money.
Lest we appear to be cheerleaders praising the virtues of gold regardless of the harsh realities of the marketplace, we've got some bad news to discuss this week.
There's more than a silver lining, of course; as Doug Casey likes to remind us, crisis and opportunity are two sides of a single coin.
In this case, as Jeff Clark outlines below, there's good news despite the bad news for gold producers, and the implications for the future are actually quite bullish.
The woes of producers aside, the last few weeks have been spectacularly good for many gold stocks, including almost all of our gold juniors. The timing couldn't have been better for those who just joined us as a result of our Upturn Millionaires broadcast. I do believe this is just the beginning, and welcome you aboard.
Senior Metals Investment Strategist
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