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Gold & silver stocks still cheap - in real terms

Commentaries & Views

Gold prices have risen and remain above previous nominal all-time-highs. Silver prices remain near seven-year highs. Related stocks are up, naturally, with many of the best hitting all-time-highs as well. This makes many investors and speculators reluctant to buy.

Understandably so; I too find myself reluctant to buy shares that look expensive.

It’s a mistake, however, to look at gold stock prices in nominal terms.

I recently wrote about the mistake of looking at gold in nominal terms. Here’s the key chart from that article, showing that gold and silver still have to rise much higher in order to reach all-time highs in real terms.

Inflation-Adjusted Gold and Silver with Daily Picks 1970 - 2020

If it’s more realistic to look at gold in inflation-adjusted dollars, the same is true for gold and silver stocks.

Since the stocks derive their value from their underlying commodities, however, it’s better to look at gold stocks in terms of gold—not dollars.

In the same way some investors like to look at the Dow-gold ratio, I like to look at the major gold stock indices as a ratio to gold. Whether gold itself is up or down, I want to know if the stocks are cheap or dear, relative to gold.

Here’s how that looks now…

A close up of a map  Description automatically generated

The data clearly show that, priced in gold, gold stocks are starting to recover, but remain quite cheap.

Gold stocks priced in gold are roughly twice as cheap as they were during the 2011 peak.

It’s interesting to ask why this might be, though I’d be skeptical of anyone who claimed to be able to explain it all. Being the aggregation of actions decided by millions of minds, Mr. Market has very complex psychology.

In my view, the more important question is what to do.

I don’t want to chase stocks that have just hit all-time highs without adding any value on the ground.

But I do think gold and silver prices will go much higher, lighting a fire under these stocks.

Given their relative bargain status, I want to buy the best gold and silver stocks when I can do so at good prices.

Fortunately, markets fluctuate. Commodity prices do so with gusto. And gold and silver stocks with a vengeance.

This has brought the market to me on two great stocks I really wanted in my portfolio—so far this month.

This does not, however, mean that I’m going all in.

I’m building my cash position because I see good odds for a larger correction, possibly on the back of another market meltdown ahead. I’d love to have a shot at averaging down on my stocks—or to buy ones that got away from me earlier. Another meltdown could provide the last great buying opportunity before the final manic peak I still see ahead for gold and silver stocks.

But, as above, I also don’t want to be left behind, especially as I expect Q3 earnings to bring a lot more generalist attention to gold stocks. That could make them much less cheap, priced in gold, even if gold trades sideways for the rest of the year.

Hence my willingness to buy—when the market comes to me.

As long as I remain bullish on monetary metals, and I can find great speculations on relatively cheap stocks, that’s my take.


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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.