-- Posted Thursday, 29 December 2011 | | Disqus

By Chris Marchese

Gold stocks as measured by the XAU index are cheaper than they were relative to the last two months of 2008. The graphic below does show the XAU was slightly cheaper relative to gold the last two months of 2008 but it fails to take into account the substantial industry wide margin expansion. For example the average total cost of mining gold per ounce is between $600 - $800/oz (varies depending on whether a mine has significant byproduct credits, mine type, etc).  Assuming gold averaged $900/oz over the first 10 months of 2008 suggests a gross margin of 33% using the lower cash cost estimate. At an average gold price of $1,500/oz., gross margins nearly double to 60%, nearly doubling the profitability of the overall industry. It is for this reason the logical argument could be made gold stocks are cheaper than they were following the 2008 market crash despite the DJIA benchmark 70% higher.

Currently, the Gold/XAU ratio is trading more than 2 standard deviations away from the mean, making them at least 50% undervalued in the aggregate. The fundamental drivers of gold have only improved as the year has progressed yet XAU index has remained severely depressed. While the overall equity market are overvalued, the Gold/XAU ratio illustrates the exact opposite occurrence in the gold mining stocks and presents an extremely lucrative buying opportunity. 

-- Posted Thursday, 29 December 2011 | Digg This Article | Source: GoldSeek.com

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