Gold-Stock Capitulation

In both gross-margin and absolute terms, gold-mining profits continue to rise dramatically thanks to these sustained high gold prices. Late last August heading into the HUI’s all-time high, its components had a market-capitalization weighted-average price-to-earnings ratio of 23.3x earnings. By the end of April, it had plunged to just 13.2x!

 

So it’s not like gold miners aren’t earning money anymore with gold near $1500 instead of $1800. They are actually earning profits hand over fist, and are seriously cheap even by general-stock-market standards. 2011 was gold miners’ most profitable year ever by far, when gold averaged $1573 on close. So far this year, despite all the bearish gold hysteria, gold has averaged $1672! This is 6% higher.

Regardless of which angle you choose to view gold stocks from, their steep selloff culminating in this week’s capitulation climax makes zero sense fundamentally. The hard truth is gold stocks have been sold wildly disproportionately to gold’s own weakness merely because investors and speculators succumbed to their own unjustified fears. Capitulations are always irrational, emotional events.

                                                            .....................Adam Hamilton