OK, let's start some serious DD on Gold Stocks.
First, Gold stocks will outgain physical gold on a rally. The point being that most mines have a fixed Cost of Production (CP).
So, let's say gold goes from (round numbers for simplicity) $400 an oz. (not pot-- the metal) to $420.
Let's say, XYZ's CP is 300 an ounce. That is a FIXED cost.
So, at 400/oz their profit is 100/oz.
If, 420/oz then their profit is 120/oz.
An investment in physical gold (excluding Broker fees and storage) would return 420 - 400 = 20/400 = 5%
But, the Net Profit-- which goes DIRECTLY to the bottom line, for the Gold Company goes from 100 to 120; so a 120 - 100 = 20/100 = 20% increase in the bottom line for a company.
Now, let's assume the industry PE ration is 10 for Gold Companies.
Investor A buys $10,000 worth of physical gold for 25oz's.
Investor B buys $10,000 worth of XYZ at $20/share for 500 shares.
Gold goes from 400 - 420 (5%)
A = Investment value of: $10,500
B = Investment value of: $12,000 (10,000*20%)
Gold goes from 400 - 500 (25%)
A = $12,500
B = $20,000 (Because profits doubled as did stock price.) |
