The beleaguered gold-mining sector continues to be plagued by monumental universal bearishness. Nearly everyone assumes the gold miners are doomed, that they can’t survive for long in a sub-$1200-gold environment. But this belief is totally wrong, a consequence of extreme fear’s fog of war. The gold miners’ underlying earnings fundamentals remain very strong, as evidenced by their recent Q3 results.
In all the stock markets, corporate profits ultimately drive stock prices. Because a stock simply represents a fractional stake in its underlying company’s future earnings stream, all stock prices eventually revert to some reasonable multiple of those profits. These earnings are truly the only fundamental driver of stock prices. All deviations from righteous valuations based on profits are just the temporary products of herd sentiment.
The gold stocks are suffering such an extreme psychological anomaly today, drowning in mind-boggling depths of popular fear and despair. The leading HUI gold-stock index just slumped to a brutal new 13.3-year secular low this week! The apathy and hate for this sector is nothing short of astounding. Anyone masochistic enough to make a bullish contrarian case on gold stocks will be peppered with scathing ridicule.
But in the midst of any universal sentiment extreme, prudent investors and speculators must disconnect from the herd emotions to take a rational look at the underlying profits fundamentals. And there is zero doubt today that prevailing gold-stock prices are truly fundamentally absurd. The last time gold stocks were priced at these levels per the HUI ages ago in July 2002, the gold price was merely trading around $305.
This post was published at ZEAL LLC on November 20, 2015.
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