Current Gold Prices Minus Current Oil Prices = Buy Gold Stocks

Gold Stock Investors may be the only group of investors who sell when their companies’ profits are increasing.

A brief inspection of the financial statements of any Gold Company reveals their biggest expenses are Labour and Energy. In fact, we often forget just how labour and energy intensive gold mining is and how much effort it takes to mine 1 oz of Gold!

Now whilst Gold and Gold Stocks did not fair well during the last selling squall, relatively speaking, they did very well. See Today gold price and gold stock price ignore bullish fundamentals for further explanation.

Take Gold versus Crude Oil for example:

Chart 1 - Gold outperforms Crude Oil when S&P500 falls

During the last stock market sell-off, Gold rose against Crude Oil (blue rectangle). Cheaper energy costs have a positive effect on the bottom line of Gold miners.

Chart 2 - Gold outperforms Industrial metals when Yen rallies (bottom of chart)

Now take the Yen carry trade. This has had an overwhelmingly positive effect on elevating asset prices. A reversal (higher) in the Yen has caused asset prices to fall and prompted the Fed to reduce its discount rate as the risk of a Global Slowdown increases.

A weakening Yen (bottom) has coincided with a period of Gold outperforming Industrial Metals. This not only reduces the cost of Gold Mining as industrial Metals e.g. Steel falls (relative to Gold) but also increases the attractiveness of Gold Miners as employers in an environment of heightened job loss fears.

In other words, labour costs will be less or at worst stagnant for Gold Miners which also feeds positively into the bottom line.

Therefore, the relative out performance of Gold versus its major cost components has caused Gold Miners to become more not less profitable.

So why dump Gold Stocks?

The answer lies in market sentiment. It’s called a panic because investors lose their sense of reason and sell out to relieve their emotional pain.

Smart and brave investors capitalize on this and buy Gold Stocks at bargain basement prices. It takes a strong and dedicated investor to do this. But it’s ultimately the stuff that Dreams are made of!

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Greg Silberman CA(SA), CFA
greg@goldandoilstocks.com
 
I am an investor and newsletter writer specializing in Junior Mining and Energy Stocks.

Please visit my website for a free trial to my newsletter.

Click here: http://blog.goldandoilstocks.com

This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.