How Cheap Are Mining Stocks Now…Are Gold Stocks Cheaper Than They Were In 2008?

The short and simple answer to this question is yes! Some will say--that is just my opinion. I could show you numerous equations proving the gold stocks were cheaper in 2008 than today and vice versa using similar metrics.

Over the past 4-to-6 weeks there have been countless articles arguing one way or other, however each one I’ve read suffers from one serious flaw, not one has even mentioned how the value of an asset is determined. The value of any asset is the present value of the (free) cash flows generated over the life of an asset.

This doesn’t mean a discounted cash flow model has to be used or even a net asset value calculation which can be accurate if any only if the assumptions or inputs which go into the model are accurate. A valid valuation model must take the time value of money into account. Furthermore, what matters isn’t the current price of the underlying commodity but the near, the intermediate and long term prices.

In this case, the underlying fundamentals for gold and silver are significantly better than they were in 2008. I will discuss why I hold that view but it is far more important to acknowledge why all these articles fail to make a convincing argument.

How the value of an asset is determined goes unacknowledged, in other words, the writers of most (not all) don’t fully comprehend the argument they were making. Even if they had said something like “the price of gold will go to $1,500/oz. in the future”, it would take the time element into account, at least to some degree but this is a rather vague explanation. The reason why Austrian Economics provides a very sound explanation of the modern day business cycle and economics in general is because time is taken into account.

All other “schools” of economic thought such as the Keynesians, Neo-Cons, and Monetarists etc. are flawed for countless reasons including the exclusion of time from human action, in other words they assume economic activity takes places in a vacuum. An example of this is using a ratio calculated by taking a mining stock index, ETF or the like such as the XAU, HUI, GDX. This would be a very useful metric IF we lived in a static world but our circumstance is quite the opposite, being we live in an extremely dynamic world. That being said, using a metric of the XAU/Gold Price or a variant thereof is absurd.

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