Don’t Fall for the “Stock Price Trap”
Editor's Note: Bitcoin just hit $120,000 — and the world is watching crypto roar back to life.
But behind the scenes, the biggest players in the space are quietly placing their bets elsewhere…
Tether — the $155 billion stablecoin behemoth — just invested $100 million into gold royalties.
Not Bitcoin. Not Ethereum. But royalty income streams tied to physical gold.
It’s the kind of move that signals something big is coming — and it’s not what most investors expect.
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Right now, there are two significant mechanisms that explain why gold stocks are still undervalued – and they’re working in tandem.
The first one is that despite a healthy run-up in gold stocks since January 1, global investors are still very underweight gold. The long run average for global assets invested in gold securities is close to 5%… but we’re still only seeing about 0.5% of global investment portfolios weighted into gold securities.
The problem as you might imagine, is that even if lots of money is flowing into gold, there’s a massive backlog of inflation/monetary expansion that means to get back to historical averages, gold asset allocation still has lots of ground to make up, and that’s while inflation continues on, year in and year out.
If even 1 or 2% of assets head into gold stocks, we’ll see the whole sector balloon. If we see a reversion to long term averages of 5%, it would likely mean the biggest gold market not just of our lifetimes, but in all history.
That’s not happening yet. That’s partially for another reason.
I’ll explain it with a real example of a stock in my Golden Portfolio service. (I’ve removed the name and ticker symbol out of fairness to my paying members, but if you’ve read the June issue of GP, you know what I’m talking about.)
Here it is:
Rationally, you might look at this chart and conclude that the stock is expensive – it’s more than tripled from lows in 2022 and is now selling for all-time highs.
But investors who only look at a stock chart and make a value judgment are falling into the “stock price trap.” It’s similar to a value-trap – where investors look at a price-earnings ratio and conclude that because a stock sells for 4x earnings that it must be a value stock.
Just like a PE ratio can only give you a snapshot of a company’s value today based on yesterday’s earnings (not where it’s going tomorrow) a stock price chart can only show you the price… not the value.
Remember what Warren Buffett says, “Price is what you pay, value is what you get.”
By my estimates, the stock in question (despite being at all time highs) is actually undervalued relative to historical valuations.
As I wrote in the June GP issue:
“[this company is currently selling at a] 10% discount to OCF/share based fair value. Many simply eyeball the stock price chart, and conclude it’s too high. That’s simply ignorant and wrong. Investors need to measure underlying profits/share and compare to the current share price to determine valuation.
We can’t control the Gold price, but GP can seek to buy profits at a discount and sell when profits are trading at a premium to fair value. And right now, based on 15 years of history, the market should be rewarding [this company] with a 10% higher share price of about $100 per share.”
I picked this stock as an example because it’s one of the more obvious and overt when you look at the stock chart. But when it comes to valuation, it’s actually one of the companies that’s pretty close to what I estimate is the fair value.
Most of the companies I’m following in my services are 50% undervalued or more. Some are over 90% undervalued – but again, if you look at their charts, they all have a similar pattern: they all look expensive relative to the recent past. Many are trading at or near their all time highs.
Even more importantly, these valuations change constantly based on where gold moves. The companies I’m following in GP all have substantial leverage to moves in gold/silver. The stock price can double or triple but if gold is moving higher at the same time, it could still be selling for a substantial discount.
And because of the “stock price trap” investors will look at a company continually rising in price, but also selling for a discount to its fair value, and they’ll conclude that it’s too expensive.
They want to buy at a lower price, regardless of value… but that means many people are missing the boat. But you have to remember that when it comes to commodities in general, and gold/silver in particular, these are very cyclical markets.
They go through decade-long bear markets where everyone who was bullish in the last cycle gets their heads caved in by false hope and dead-cat bounces.
It takes years for a real bottom to be carved out of the gold market before a new bull emerges. And even when it does emerge, most people just don’t/won’t believe it until it’s too late.
The general investment public is still in the "skepticism" stage of this bull market.
They won’t pile in until every major magazine, newspaper, podcaster and cab driver is euphoric about gold. We’re clearly not there yet. Not even close. Most investors are still eyeing charts like the one I posted and thinking “it’s too expensive, I’ll wait.”
And they will wait – until the whole sector has jumped 2x-5x…
By then they’ll be buying over-valued gold stocks from early investors.
Like you and me.
Best,
Garrett Goggin, CFA, CMT
Lead Analyst and Founder, Golden Portfolio