I was listening Top Traders Unplugged: Global Macro episode 70. It learned much listening this podcast. Highly recommend you to listen and follow it.
There is a talk aboout gold in this episode, around min. 13 to 25. I think it is really important talk for gold and i want to share my thoughts on this.
As we all know, gold prices have surged. One reason for this is that central banks are buying gold. Some of them—like China—dislike the dominance of the dollar and how the U.S. uses it as a weapon in political conflicts. Gold has surged for many reasons. However, gold stocks haven’t risen as much as they should, given the increase in gold prices. That said, I believe it would be a mistake to say gold stocks haven’t and won’t increase along with gold prices. But I still don’t think gold stocks are a good investment. Let me explain why.
When gold prices surge, gold stocks should logically rise due to their net asset value. This only guarantees they will increase because the price of their underlying assets—gold—has increased. But they don’t rise due to demand for the stocks themselves. Investors and central banks are buying gold, not gold stocks. The problem is that gold stocks have 2-3 times more volatility than gold. If gold stocks rise purely because of gold’s price increase, they will only match gold’s gains. However, they carry much higher volatility. I’m not saying volatility equals risk exactly, nor am I saying volatility is inherently bad. We know it’s not. Volatility increases both downside and upside potential. But if we have two assets with similar upside potential, and one has higher downside risk, it makes sense to choose the one with lower downside risk.
If we look at this from an asset value or balance sheet perspective, gold stocks don’t offer more value than gold itself—they simply add more risk.
What would be more interesting is if the income of gold companies increases due to the rising demand for gold. In that case, they might be undervalued, as their income would act as leverage compared to gold. So, if there are strong growth projections for their income, I might agree they are undervalued. Otherwise, they are just riskier.