What's Gold Really Worth?

Gold Mining stocks don't offer much value compared to the metal right now...

"IF WE HAVE a robust Gold Price, we are going to have a robust junior-stock market," asserts Mickey Fulp, otherwise known as The Mercenary Geologist.

A Certified Professional Geologist with a bachelor's degree in Earth Sciences with honors from the University of Tulsa, and a master's degree in Geology from the University of New Mexico, Mickey Fulp has over 30 years' experience as an exploration geologist searching for economic deposits of base and precious metals such as gold and silver,  as well as other resources.

Respected throughout the mining and exploration community due to his ongoing work as an analyst, writer and speaker, Mickey Fulp speaks here to the Gold Report about how Gold Mining valuations don't currently reflect the price of the metal...

The Gold Report: Mickey, last time we spoke with you in January, you were still digesting what happened with equities in 2009, and you weren't ready to comment on what that might mean for 2010...

Mickey Fulp: We spoke very early in January about 2009, which was arguably one of the best years ever for the junior resource sector. I felt it was undetermined at that time if there was still upside within the junior resource market or not.

The benchmark for the junior resource sector is the Toronto Venture Index. That's up 7% since the beginning of this year. We have a very strong chart since mid-December 2008, which was the five-year low. It's been a steady march up, but we're still 50% off the high from April of '07 of 3,362. The Venture Index is about 1,650 right now. What that tells me is that as a whole, the junior resource sector is still struggling, but good companies within the 1,750 juniors on the exchange are prospering.

Lots of bad companies have been left behind in the run-up. Plus we've had this Goldman Sachs/SEC debacle going on the last couple of days. Everybody knows this is just the tip of the iceberg. In the major markets, I think there are questions as to how this will play out in the short- to mid-term. Within the junior resource sector, if we pick good companies we still have upside as long as the gold price stays high. Of the 10 companies that I have covered for at least 12 months, all have at least doubled at some point within that 12-month period.

TGR: You said in January that you didn't see many undervalued junior resource companies at that time. Has anything changed?

Mickey Fulp: No, I still don't think there are many undervalued companies. Let's take the gold business specifically, because the Toronto Venture market for the most part tracks the price of gold. If we have a robust Gold Price, we're going to have a robust junior stock market. They're not one-to-one correlative, but this market is driven by the Gold Price.

And if you look at valuations now, they're at an all-time high. Recent week-to-week evaluations are $85 to $90 per ounce for in-situ gold resources. I should point out that I'm talking about advanced explorers, because that's what I generally cover. I think that the best returns can be made in the stock market with advance explorers; not particularly with grassroots explorers unless they're prospect generators, and certainly not with small or mid-tier miners, which are what we find on the Toronto Stock Exchange. Peer evaluations are at an all-time high.

You can make the case that with gold trading at a relatively narrow 10% range this year of $1055 to $1155, the market has performed better than gold has, up 7% on the index. As an analyst, I often use 10% of gold's worth as a fair valuation for gold exploration companies. Notice I am saying, "what gold is worth," not "what the gold price is," because that is dependent on the US Dollar. When the US Dollar is strong, the Gold Price generally suffers. Gold is at an all-time high in Euros, but I'm sure you've noticed that the Canadian Dollar is on par with the US Dollar now.

So let's go back to the question: what is gold actually worth? Following Paul Van Eeden's logic, we look at the Gold Price in US Dollars compared to the monetary supply. With the inflation of gold being new gold mined, and the inflation of the Dollar being the increase in monetary supply, you come out with a fair price of what gold is worth of about $850 in US Dollars. The other $200 or $300 that gold is trading above $850 is pure speculation. Based on about 10% of what gold is worth, $85 to $90 per ounce in the ground is probably what companies should be valued at. So I look for gold companies that currently are undervalued compared to their peers and have chosen to cover a couple of those since we last talked.

TGR: We were talking about looking at undervalued stocks and you eloquently explained how you look at the worth of gold in contrast to its trading price, that being $850 to $900. Do you see other undervalued sectors that you look at and think, "Boy, the market just hasn't gotten this yet?"

Mickey Fulp: The only sector that I think is absolutely undervalued as a whole is uranium. It certainly has been beaten to a pulp with the 2006 boom and 2007 bust and I think that segues into what we'll talk about next in The Energy Report.

TGR: We look forward to that discussion. Thank you for your time.

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