I'll Take A Crack At Explaining The Performance Of The Mining Shares

Here's a good read on miners from a fellow metals blogger.

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I'll Take A Crack At Explaining The Performance Of The Mining Shares
http://truthingold.blogspot.com/2011/04/ill-take-crack-at-explaining.html

There's been reams of discussion recently about the performance of the mining shares relative to the price of gold/silver. I believe a lot of the disappointment in the performance of the shares is because the metals have been hitting new highs almost every day now. But there are a lot of "levers," or variables, that drive mining share valuation - not just metal in the ground multiplied out by the price of gold/silver. And make no mistake about it, the HUI and XAU have been hitting new all-time highs during this period, so anyone not making money in the mining shares should reassess their strategies and anyone not happy with their bounty will probably always be a malcontent.

But rather than let our views get overwhelmed by conpiracy theories and childish whining, let's cut to the chase and just look at some numbers and market theory. I'm going to keep this simple for illustrative purposes. To begin with, the price of a stock at any given time largely reflects the current fundamental value, or instrinsic value, of the company plus some expection of the company's future prospects. So if a mining stock is priced at $50, that value reflects everything that is currently known about the company and its industry fundamentals PLUS it contains some value that reflects what the market thinks will happen in the future. So for a solid mining stock at $50, that price contains the public knowledge that gold is at $1500 PLUS some "discounted value" for the expectation/probability that the price of gold will be higher in the future. So just because gold goes from $1400 to $1500, if the market thinks that $1500 is all we'll see, the price of the stock won't move. This is "rational expectations" theory in a nutshell and is good for explaining a large part of stock market valuations, everything else being equal.

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