At $1000/oz Can Gold Be Cheap?

Last week when gold started flirting with $1000, the gold stocks caught a serious bid. On an impressive 3.8% 2-day gold rally, the flagship HUI unhedged gold-stock index rocketed 15.7% higher! And the volume in this index's elite gold stocks was staggering those 2 days, 2.8x the 3-month average.

This blisteringly-fast surge easily drove the HUI up to new 2009 highs, eclipsing the 398 witnessed in early June. To see any stock index blast nearly 16% higher in a couple days is exceedingly rare, so naturally all this excitement captivated traders. But it also led to growing fears that this sector is overbought and richly valued, ripe for an imminent correction.

Ever the contrarian, I disagree with this increasingly popular assessment. Despite their big run, gold stocks are still cheap. The primary reason is the massive anomaly in gold-stock pricing driven by last year's brutal stock panic. Now approaching the first anniversary of that terrible event, gold stocks still continue to gradually normalize relative to gold. Until this necessary process is complete, they remain great buys.

The foundation for this bullish case is the indisputable fact that gold ultimately drives gold-stock prices. In general, a higher gold price translates into higher profits for companies mining this metal. And in the stock markets higher profits always eventually lead to higher stock prices. Any company's profits are the most important driver by far of its long-term stock price. And for gold companies, the gold price controls profits.

I'll be honest ... I really don't know what the fuss is about. Gold, like anything else, is worthless until and unless you can find somebody who will pay you something for it that is worth more to you than the item that you're selling. Gold and silver has no more intrinsic value than paper money. Unless you can find someone is willing to accept your gold for something that you want, it's just another rock in your pocket. My talents for handyman- and repairman-type work .. construction, plumbing, electrical .. are what I would be using in a SHTF situation to gain items of value to me. My military and survival training is an asset. I am armed and trained on how to use the weapons that I have, have a wife who knows how to use a weapon, and we have enough acreage and house-room to help and house her children and their families if necessary.

But gold? Lead, gunpowder, casings or whole rounds will be a more practical medium of exchange than gold, silver, or something else that's shiny. At least that's the way that I see it. As I wrote earlier, an item is only as valuable as what someone is willing to pay for it. If I'm hungry, I'd rather have a 30-06 round in my pocket to shoot the deer that's across the field than hoping I can find someone who will take my gold coin or piece of jewelry for a meal.

“Gold and silver has no more intrinsic value than paper money. “

Paper is just that, paper. Gold and silver are both metals used in industrial applications and consumer goods. Paper isn’t. Paper can, and has, become worthless. Gold and silver never have.

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