I am sure we have all been following the rise of gold in the last 6 months or so peaking at just over $1000 per oz.Gold has now worked its way back down and is sitting today just shy of $870.There could be many reasons for this including the whispers about concerted Central Banks efforts to push the price down. One thing that stands out though is that even when Gold shot up to over $1000 the Gold Producers didn't follow along
America's largest gold producer, Newmont Mining (NEM), announced its first-quarter earnings towards the end of April. The company's revenue was 60% higher than the same quarter last year. Its average selling price for Gold was $933 per ounce during the quarter, up 40% from the same time in 2007. Unbelievably Newmont's share price fell !!
This seems to be common across the industry currently... and I think it just might be fantastic opportunity to get into these stocks.Gold prices have doubled since April 2005 to today. However the share prices of major gold producers have hardly moved. Newmont Mining's shares rose only 6% over the same period.
Usually Gold Producers shares perform even better than Gold... meaning that if gold doubles in price, gold stocks often quadruple in price. It all comes down to the "leverage effect"...
If a Gold Company can mine gold for $200 an ounce and sell that gold for $300 an ounce, it makes a profit of $100 an ounce. However, if the gold price jumps to $500 an ounce, the profit per ounce increases from $100 to $300... Now let's say the price of gold really gets rocking, increasing $800 an ounce profits increase dramatically. You would therefore expect that the share price would respond in expectation of these profits .However, it hasn't quite worked out that way in the past few years. Due to the soaring costs of fuel, equipment, and upgrading facilities, the costs to mine gold have risen nearly as much as the gold itself!
On May 1, 2006, the AMEX Gold Bugs index (HUI), which tracks the big gold mining companies, closed at 380. Today it closed at 407. The index has hardly moved during a period in which gold gained more than 30%. But I think the news from Newmont is the latest sign that gold miners are now really starting to rake in the cash. Newmont's quarterly profit rose 444% over the first quarter of 2007. The elevated gold price is finally kicking in. And the situation is the same with other big miners, including Barrick and Goldcorp... But like Newmont, these stocks are sitting dormant right now.
If you don't have exposure to gold stocks yet, now is the time to get some. I think we are still in a raging bull market for gold and that the current prices for the Gold stocks are way off where they should be if that is true.