GOLD STOCKS 101: For New Investors
Market Capitalization
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Market cap is the number of shares in circulation times the price. The total market cap of all gold mining stocks traded on all three US exchanges is about 30 billion. A single tech company like AOL has a higher market cap. What this means is that even small capital inflows into this sector will generate explosive increases in stock prices. There’s not that much stock out there to buy. For example, if just 5 percent of investors in GE (market cap 440 billion) got interested in gold stocks, the flood of new money could easily double gold stock prices.
Study the charts around the time period of Sept. 99. Gold jumped to over $300, and the mining stocks went ballistic (some of them doubled). And that was before all the attention now being showered on gold with the GATA lawsuit (www.gata.org ). And that was before the new emphasis on value investing.
It is extremely critical that you take your positions now. Once the gold train starts moving, you won’t be able to get in at the price you want. Limit orders will get blown right past.
Earnings Potential
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New gold investors have to understand the very unique profit/loss landscape of this sector. It has very high fixed costs with almost zero cost of additional sales. Most US miners has a total production cost (not cash cost) of somewhere around $270/ ounce. At today’s gold price, most miners are either losing money or barely scraping by. EPS across the sector are either negative or a few pennies per share.
But if gold pops up to $290 or $300, these same companies will suddenly earn 20 or 30 cents a share. That is a 2,000% increase in profit (if they were earning 1 cent a share). There’s no other sector in the universe that can match this bottom line potential. With gold at $350 or $400, these companies become CASH MACHINES. The large caps could easily jump 400%, the small caps could easily jump over 10 tenfold.
With gold up in the mid to high $300’s you will see significant dividends being paid by these companies. Even the recent article on thestreet.com (link below) spoke about how, in the 70’s, these companies paid out more in dividends than the (early) buyers paid for the stock.
This scenario is reversed when the POG (price of gold) goes down, like it has for the last few years. Everyone wanted tech, no one wanted gold. The mining companies stopped making money, and no one wanted them anymore. Take a 10 year chart of the POG (see kitco.com), and lay it on top of a charts for various mining companies. You will see.
It is critical is to get in early. Gold might drop on Monday, but the trend is unmistakable, and things are just warming up.
LINKS FOR MORE INFO:
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gata.org
egroups.com
kitco.com
gold-eagle.com
thestreet.com
usagold.com
tocqueville.com
A handful of Gold Sector Mutual Funds:
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quote.yahoo.com |
