In recent days, I’ve received numerous inquiries about the perplexing situation in the market: as gold prices soar to unprecedented levels, why are gold stocks lagging behind? This question warrants thorough analysis and exploration.

The phenomenon we are witnessing seems to suggest that gold stocks are currently experiencing what can only be termed a mispricingTraditional wisdom guides us to believe the relationship between bullion prices and gold equities should exhibit congruenceHowever, we find a divergence—gold prices are on the rise, yet gold stocks are not following suit, creating a sense of bewilderment among investors.

With gold hitting historical highs (reaching $2617.4 per ounce) amid expectations surrounding Federal Reserve interest rate cuts and fears of an economic downturn, it is evident we have reached a critical juncture in the marketsMarket consensus also suggests that with declining real interest rates in the U.S. and waning dollar credibility, gold prices are poised to continuously climb to new heights.

Yet, the current reality presents an irony; while gold prices surge, the performance of gold stocks tells a different storyThis misalignment has led many to question the validity of their investments in gold equities.

One of the primary concerns among investors is whether gold has reached its peakThere exists a dichotomy within the market—some fear that the anticipated interest rate cuts may not be as robust as currently theorized, suggesting that the current gold prices are already factoring in these expectations

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Others raise caution regarding the possibility of a soft landing for the U.S. economy once the cuts are realized, potentially signaling the end of the current gold bull market.

So, is this gloom warranted?

A retrospective on the market reveals that after the Federal Reserve initiated its rate-cut cycle, gold underwent a brief correction, perceived as the market digesting the positive newsHowever, soon after, significant cash inflows into gold ETFs propelled prices to new heightsAnalysts at Goldman Sachs even predict gold could reach $2700 per ounce by early next year, with their rationale rooted in the belief that the Fed's rate strategies will catalyze renewed inflows into gold ETFs from Western investments.

This sentiment echoes among several analysts in the U.SThe Chief Investment Strategist at Bank of America, Michael Hartnett, recently reported that the interest rate decreases could spark a resurgence in inflation next year, noting that physical assets like gold have historically thrived during inflationary periods.

Next, we must address why gold stocks are stagnating.

Investor sentiment is greatly influenced by market trends—classic investment theories often depict a close following, much like a dog following its ownerIn this case, however, despite gold prices climbing, gold stocks seem to diverge sharply.

Many investors believe gold equities have been unfairly punished in this scenario.

The root of this mispricing can be traced back to two significant factors.

Firstly, market conditions have been quite bleak overall, marked by low investor sentiment and plummeting trading volumes, thus applying downward pressure on the broader A-shares market

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In turn, this has negatively impacted gold stocks, exemplified by the lagging performance of the gold stock ETF.

However, the current valuation at around 2700 points seems to echo earlier lows seen this year, suggesting we are likely close to a bottom from several analytical perspectives, such as performance growth, valuation, and trading volume.

Secondly, there has been a trend of speculative investors who heavily positioned themselves based on gold price movements; with the impending interest rate cuts in September, many opted to cash out, leading to an early sell-off in gold stocks.

While the short-term fluctuations remain unpredictable, the long-term investment thesis surrounding gold stocks remains robust.

For starters, the pricing of gold assets predominantly occurs on international platforms, leaving Chinese investors at a disadvantage—a stark contrast from commodities like steel, cement, and coal, where local pricing dominantly influences the marketSince 2016, Chinese gold stocks have aligned closely with gold prices, indicating that the local investment scene mirrors broader global trends in precious metals.

Furthermore, in a context of prolonged U.S. dollar depreciation and increasing gold purchases by central banks, gold is gradually moving away from its cyclical volatility, crystalline patterns emerge in demand, creating a bullish narrative moving forwardIn the next couple of years, the gold production capacity in China is expected to grow significantly, allowing investors to benefit from price increases and yielding positive alpha returns.

Calculating backwards, one finds that the market capitalization of gold stocks currently implies an undervaluation relative to present gold prices; the situation may indeed reflect stagnation.

Moving on to gold stock ETFs, this segment has shown resilience against downward adjustments despite the overall market facing headwinds

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