Thursday, April 2, 2009

Margin of safety

Historically a Gold:XAU ratio of 5 or higher has been a sign that mining stocks are too cheap.

I often field questions from investors worried that the B wave decline isn't over yet. My response is "so what". Gold could drop to $800 and the mining stocks would still be too cheap. As a matter of fact the XAU would have to rise to $160 just to get back to historically cheap valuations if gold were to drop to $800.

The bottom line is that investors now have a huge margin of safety in mining stocks even if gold's B wave has further to go. They should continue higher even if gold drops a bit more.

In case no one has noticed that is exactly what they have been doing for the last month.