First, he makes the observation that since 2008, the HUI index has lagged the performance of Gold:
If you review the chart below, you’ll notice that while the gold price has almost doubled since early 2008, the HUI Index has appreciated by a mere 22% over the same period (see Chart A). If the HUI was justified at 500 in early ’08, it should surely be justified at 1,000 today, given the appreciation of the gold price over that time. So why have the equities lagged?
Then, he explains that the difference is due to investors gold price expectation that are as low as 1000 USD in 2014 (average expectations;:1340 USD per ounce) and the stock market being forward looking that would explain the performance difference between gold miners and gold bullion. However, the future markets say at different story with a 2013 gold price at 1909 USD.
Third, in 2008, Gold stocks are been hammered (some have gone bankrupt) following the sharp drop in the price of Gold, so investors may be wary of increase their Gold stock positions.
However, as recently as August 2011, the trend has changed. We have seen day where gold dropped and gold stock went (slightly) up. The price divergence is massive when bank stocks and compared to gold stocks (See chart comparing KBW bank index vs HUI gold index).
He carries on explaining that the current production price is 800 USD, and if Gold is 1800 instead of 1200, this would represent an increase of 150% in profit margin. He is amazed that – despite this new reality for gold producers - they are still finding opportunities in select gold and silver mining companies that can be purchased today at 2-3 times their 2-year-out forecasted cash flow and it would even become cheaper if Gold price continue to rise as Sprott Asset Management forecasts.
In conclusion, he believes the equities will offer more upside than the bullion over time and the prospects for gold stocks look extremely bright.
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