Zeal on the Ultimate Contrarian Buying Opportunity in Gold

Zeal121313BThe gold-mining stocks have suffered a disastrous year, plummeting while the rest of the stock markets soared.  This vast performance gap has catapulted bearishness on this sector to epic extremes.  Few own gold stocks anymore, and everyone aware of them loathes them.  This has crushed their stock prices to unsustainable fundamentally-absurd levels.  They now offer the ultimate contrarian buying opportunity.
Gold stocks are so absurdly cheap that some of the smaller miners are trading under 7x earnings even at today’s gold prices!  Contrast this with S&P 500 valuations around 23x.  No matter what gold does, sooner or later value investors are going to take stakes in the dirt-cheap gold stocks.  And since this sector is so out of favor, it won’t take much buying to catapult these stocks higher.  It is inevitable.
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Adam Hamilton: Contrarian Gold Stocks

Zeal011813ASubmitted by Adam Hamilton:

Before investors can sell high and multiply their wealth, they first have to buy low.  The lower any trade’s entry price, the greater its ultimate profits.  The best time to buy low is when stocks are deeply out of favor, when few others are willing to buy.  And that certainly describes gold and silver stocks today.  This sector is universally loathed despite fantastic fundamentals, offering vast opportunities for brave contrarians.

Gold stocks are trading today as if gold was far lower, as if they had little hope of ever earning big future profits.  There is a vast fundamental disconnect between these miners and the price of the metal that drives their profitability.  This critical point is easily illustrated through a simple construct known as the HUI/Gold Ratio.  It divides the premier gold-stock index, known as its symbol HUI, by the price of gold.

Contrarian investing is simple in concept, yet very difficult in execution.  The fortunes of stocks flow and ebb, their prices rising and falling.  After they’ve risen, they quickly become popular.  Everyone wants them and bids up their prices.  That’s when it feels the best to buy, so that’s when the great majority of investors rush in to chase the rally.  But following the herd leads to buying high, the recipe for failure.

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