After surging sharply in August and early September, gold stocks have been consolidating sideways ever since.  Naturally this loss of momentum has sapped the nascent trader enthusiasm for this sector.  But stalling out temporarily certainly doesn’t negate gold stocks’ dazzling fundamentals.  They remain deeply undervalued relative to gold, the metal that drives their profits and hence ultimately their stock prices.

While sentiment (greed and fear) dominates short-term stock-price swings, over the long run stock prices are nearly exclusively determined by fundamentals.  Investors buy stocks to own fractional stakes in the underlying companies’ profit streams.  The bigger those profits grow, the higher the stocks are bid of the companies earning them.  And for gold stocks, the gold price controls the vast majority of profitability.

Unlike most other companies, gold miners effectively have infinite demand for their product.  They can easily sell every single ounce of gold they manage to produce.  They never have to discount, the market price is what they get.  And with mining costs largely fixed, higher gold prices flow directly into bottom-line profits.  And because of these fixed costs, profits rise much faster than the underlying gains in gold.

This profits leverage is easy to understand.  Imagine a miner selling gold today for $1700 that it produced for $700.  Its profit is $1000 per ounce.  But if gold rises 25% to $2125, profits would surge to $1425 since production costs are essentially fixed as mines are planned and built.  That’s a 43% increase in profits driven by a 25% gold rally!  This profits-leverage growth is more exponential than linear as gold climbs.

…..read much more beginning 4 paragraphs above this this chart HERE