TODAY'S DISCOVERY, TOMORROW'S FUTURE

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Message: Some thoughts on bullion vs stocks

After comparing the performances of gold bullion, the GGI and the HUI, we arrived at these conclusions:

1. If the HUI had done a good job of representing the performance of the average gold stock then it would now be trading in the 350s rather than the 450s.

2. The components of the HUI are, on average, about 30% over-valued relative to the average gold stock.

3. Right now, the risk/reward ratios of popular gold-stock indices such as the HUI are considerably worse than the risk/reward ratio of the average gold stock.

4. Relative to gold bullion, the average gold stock is presently as cheap as it was at the May-2005 bottom.

5. The average gold stock currently has a lot more upside potential than gold bullion.

6. There will be some doubt that a major new upward leg is underway until a broad-based gold-stock index such as the GGI moves to a new all-time high. In the mean time it might be unreasonable to expect exploration-stage gold stocks, as a group, to make much headway. However, due to depressed valuations and the likelihood that the financial backdrop will remain “gold bullish” for the foreseeable future, the intermediate-term risk/reward for the speculative end of the gold universe has never been better.
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