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Author: BensonInvestor Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 21  
Subject: Gold Stocks 101 for NEW Investors Date: 4/3/2002 6:03 PM
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Gold investors must first understand that gold mining companies are highly leveraged to the price of gold. Mining companies have very high fixed costs; above these costs, it's all profit. Here's a simple example... Many miners have a total production cost (not cash cost) of somewhere around $270/ ounce. When gold is $272, they might have a profit of $2 for every ounce they produce. But with gold at $290, their profit jumps to $20 an ounce (900% increase). This example assumes no "hedging".

You should spend your time looking at the quarterly reports from the gold miners and calculating the vast increase in profits that they will show with a gold price at $300+. For many of the gold miners, profit increases of over 300% will be easily accomplished during this first year of higher gold prices. The smaller gold miners will see the biggest profit increases - they are usually the most leveraged.

Any commentary about gold stocks being expensive is a flat out wrong. You can't analyze gold stocks without considering where the POG (price of gold) is headed. The Analysts are restrained because they want to slow things down so their firms can get in with large buy orders. If you think my cynicism is misplaced, ask yourself why there have been almost no Analyst upgrades for the miners - even though it's been the best performing sector for over a year. As a matter of fact, Goldman Sachs downgraded gold (the physical metal), and Placer Dome (PDG), in early January. Meanwhile, sites that report institutional holdings (like the Nasdaq site) show huge institutional buying of gold equities.

Traditionally, the mainstream press has tried to avoid covering the gold sector. When they did cover it, they often presented negative spin by the bullion banks. These banks don't want gold to go up because most of them are short. But now they are starting to cover gold with more honest insight. Notice how CNBC covers gold in the afternoon, but not on Squawk Box. CNBC is playing nice now, but would quickly slam gold if they could.

This whole sector will see profit increases ranging from 100% to 2,000% this year. You will see the PE's of some of these stocks cut by a factor of ten with the profit increases (assuming no price increase). Some of these stocks (like BGO) still trade below book value!

It's also important to understand the potential for dividends. Gold mining companies have a history of paying the highest dividends in history (when their profits are up). The South African miners (GOLD, HGMCY, DROOY) pay the highest dividends. Gold Fields (symbol GOLD) pays out 50% of their profits in dividends, that fact is documented in their recent quarterly report. GOLD could rise from $8 to $30, and then declare a 15% dividend.

It's also important to understand the market capitalization issue. The total market cap of all gold mining stocks traded on all three U.S. exchanges is only about 70 billion. A single tech company like AOL has a higher market cap. This means is that even small capital inflows into this sector will generate explosive increases in stock prices.

The following websites are excellent resources. Not providing links because some websites reject posts with links. Almost all are dot com, GATA is dot org. I highly recommend reading the GATA messages (Yahoo Groups), it will give you a feel for just how long gold has been held down, and how powerfully it will now go up (read some of the posts from a year or two ago). The Tocqueville website is also great. There are about 7 "Brainstorms" on gold.
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GATA messages (can link from main GATA page)
USAGold (Daily Report & Gold Discussion links)
Gold-Eagle (Digest & Forum links, 45 million hits since inception)
321Gold
Kitco (current gold prices and historical gold charts)
TheBullionDesk (Newswire link)
PrudentBear
Tocqueville (Brainstorms / they have a good gold fund too)

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