By Jeff Clark, Casey Research
We've been saying since September that gold producers are undervalued, and here are some data that show just how extreme the undervaluation is.
The following chart measures the stock prices of major and intermediate gold producers against their Net Asset Value, based on the daily price of gold. In the simplest terms, a company should be worth more as the product it sells rises in price faster than the cost of those sales. In this case, gold has doubled in price over the past three years while costs have not kept up, dramatically increasing the intrinsic value of a reasonably well-run gold producer. Yet look what the stocks have done when measured against this higher value.
In spite of a rising gold price, stock prices have steadily fallen. In fact, as the right axis shows, the industry is currently selling at a 20% discount to its Net Asset Value (as of October 21) – and historically, gold stocks trade at a premium.
Notice that gold stocks hit 1.6 times their NAVs just before the crash of 2008. Gold producers often trade at this level. If I'm right, companies will revert to historical premiums, meaning much higher stock prices than today.
These data don't tell us when prices will rise, nor do they signal that stocks can't trade lower. They are simply telling us that at this point in time, gold stocks represent a true bargain. Someday this won't be the case, and the opportunity to buy at current levels will be gone.
I'm convinced that in a year or two, we'll look back and be very happy with our positions.
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