Mines' Eyes Have Not Seen the Glory

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Until recently, analysts haven't been using $1,000/ounce gold in their forecasts. Their consensus forecast for gold this year is in the $850/ounce range. At $1,000 an ounce, it's a different story, and gold stocks could get a boost of support if those price levels hold up.

Gold prices are on a relentless march toward $1,000/ounce. Gold bullion closed on February 29 at $974 an ounce on the New York Mercantile Exchange, and some precious metals analysts are predicting gold will eventually reach $1,700 an ounce or more.

The reasons for the strong move are many. Gold historically has had a strong positive correlation to the price of oil and an inverse relationship to the dollar. With oil on an upward trajectory and the dollar weakening, gold has been following the script. Meanwhile, rising demand for gold in emerging markets, a growing fear of inflation, the unknown depth of the credit crisis and prospects of a U.S. recession are also factoring into the gold rally.

But the interesting thing is, while gold price have gone up and up, gold equities, i.e., the stocks of gold mining companies, haven't kept pace...

There are many reasons for the disparity between the share prices of gold mining companies and the price of the metal. First, gold stocks are typically valued using the rearview mirror. When Wall Street analysts come up with their price targets for the shares of gold mining companies, they're looking in the rearview mirror. They typically don't incorporate the full value for a commodity price that is pushing to new highs, because they assume that the metal will soon come down. So analysts, at least until recently, aren't using $1,000/ounce gold in their forecasts. Their consensus forecast for gold this year is in the $850/ounce range. At $1,000 an ounce, it's a different story, and gold stocks could get a boost of support if those price levels hold up.

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