It is easy to dismiss the recent bounce as at technical rebound, but there is also a chance that it may take EGO 10% higher. That will depend on how the gold prices behave, but the current levels are likely to lend some support. $1200 is the key, and the bottom may not be far. Not many would agree as the sentiment is negative, but usually the turnarounds begin as suddenly as the declines. Jim Rogers had stated that he would buy gold around $1300 and $1200. The recent bounce has taken EGO up by 9% and the volumes have been extremely high. Most gold stocks have behaved similarly. Valuations are also very low, and most are trading below book value. Development stage companies like Pershing Gold (PGLC) are at even lower valuations. Marc Faber had stated that if gold price rises, then the rebound in mining stocks will be much stronger. The fall in gold stocks has surely been more than the fall in gold prices. EGO is nearly 62% below its 52 week high. The forward P/E is now below 13, and the price to book is 0.70. Even the debt on books is reasonable when compared with the peers. The exposure of EGO around the world makes it riskier compared with the companies that have assets solely in the US. The last quarter was bad as it posted a net loss, but the last few years have been better. Usually these times are good as the valuations are relatively more attractive, but not many dare when the sentiments are bad. Hindsight may lead to other conclusions. The next few weeks will provide an indication about the short term trend. The best case scenario is that the stocks start to trade in a range with the recent lows providing support.
Gold stocks dropped more than gold because of valuation. When gold price drops below production cost level, it means serious valuation problems for stock, while for gold itself it is just another price point.
At current gold price levels, every (with very few exceptions) exploration/development stock is priced to extinction because gold industry doesn’t need in new gold mines that may not generate profits. Also, any forward PE projections for gold producers are partially fictional; analysts didn’t finish downgrades yet; so far their estimates don’t project current gold price for too long period. Also, book values are not too important for gold stock valuations.
In other words, gold stocks are still supported by hopes that current drop in gold price is temporary and short-lived. It makes long plays risky, as anything based on hopes. If present rally will continue for few more days next week then one can expect increasing selling into strength; lucky buyers around $6 will lock in profits.