Gold Stocks are Trades- Not Investments

March 29, 2008 3:41 PM

If you take the Cramer’s of the world advice and go long stocks such as AEM, NEM, GG, etc, you need to understand what you are doing. These stocks are “temporarily” priced on the gold euphoria and the implosion of the dollar. Therefore, if you buy these, you need to understand the dollar and gold. For instance, if the dollar ever puts in a bottom againt the Euro (it hasn’t as of yet, IMO) then gold related stocks will get crushed as the extreme views of gold at $2,000 an ounce will be gone. I had mentioned the day before the recent dollar plunge, that if the dollar breaks 1.4968 against the Euro, it is going to get crushed further….it did. Point being, that was when you had to be long gold and related stocks.

Let’s look at fundamentals. AEM has a PE ratio of 72. Assuming they can TRIPLE earnings, the PE would be about 23 - still a high valuation with possible downside risk. Now let’s assume they cannot increase profit’s by 300% going forward and long term. Well, you know what would happen - the stock would drop massively, probably by far more than 50%.

If you do not feel comfortable in predicting the price of either the dollar or gold into the future, these stocks should not be considered an investment. They are a trade.

Written by · Filed Under AEM

Comments

One Response to “Gold Stocks are Trades- Not Investments”

Bear Market Plunge: StockBlade Timeline Of Views For 2008 | on October 28th, 2008 12:14 am

[…] 29th “Gold Stocks Are Trades Not Investments” I warned that these stocks were being driven by euphoria in gold, and should not be consider […]

Got something to say?