Gold stocks are cheap, but should you buy?

Julie Brownlee, Fsp Invest, 28 Oct. 2015

Tags: gold, gold stocks, cheap gold stocks, gold price, buying gold stocks, investing in gold stocks,



Looking back, gold producers saw their share prices rise some 600% from 2000 to 2004. Yet the four years before that saw gold producers fall 84%.

Fast forward to the present and gold stocks are looking cheaper than they were back then.

So is it time to invest in gold stocks?

Let’s take a closer look…



The gold price and gold stocks


The gold price is far from its highs of 2011. It’s down around 30% over the past four years.

But looking at gold stocks, they’ve performed much worse. For instance, the NYSE Arca Gold Bugs Index (HUI) is the US benchmark gold stocks index. It’s down a whopping 75% over the same period of time.

You can use this to calculate the gold-to-gold-stocks ratio. To get this take the price of the HUI and divide it by the price of gold. When the ratio is low, gold stocks are cheap. When the ratio is high, gold stocks are expensive.

This ratio has recently hit an all-time low, Dr Steve Sjuggerud in Daily Wealth explains. You can see this in the chart below…


Gold-to-gold-stock ratio

Since June, it’s continued to hit new lows.

Of course, using this ratio doesn’t look at a number of factors, including production costs and other costs a gold producer has. But it does give you a simple view of what’s going on.


This key gold ratio indicates great times could lie ahead for gold stocks


But what you should know is that when the ratio hit extreme lows in 2000 and 2008, gold stocks went on to rally 418% and 226% respectively.

Whilst you can’t be sure that the bottom is in gold stocks yet, once they start to recover, there is a strong possibility of fantastic gains in the years ahead.

To play it safe, you’d should wait for a recovery in the price of gold stocks to begin. When this happens, investing in gold stocks could be very profitable.

So there you have it. Gold stocks are cheap, but you should hold off buying for the moment.

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