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 markets

Market consensus also suggests that with declining real interest rates in the U.Sand 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 expectationsOthers raise caution regarding the possibility of a soft landing for the U.S

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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.S

The 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

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 market

Since 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.Sdollar 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

The gold stock ETF has broadly captured the major players in both domestic and overseas markets, providing a clear representation of the market attitudes towards gold stocks.

Historically, there exists a narrative where gold stocks often peak before gold itself, driven by speculative trendsHowever, history illustrates that when gold prices break through resistance levels, gold stocks invariably follow suitThe trajectory of gold stocks from October 2023 to February 2024 serves as a prime example, where early pessimism led to premature selling, only for stocks to rally after gold performed above $2100.

Looking ahead, a compelling catalyst is on the horizon; central banks are increasing their gold holdings, further reinforcing the case for gold as a strategic asset

Just in July, seven central banks increased their reserves by a ton or more, with only one bank trimming its stock, bolstering gold prices on a medium to long-term basisA broader understanding of the global credit landscape, where the reliability of the U.Sdollar faces scrutiny, adds another layer of demand for gold.

Overall, the recent adjustments in gold stocks have been a byproduct of speculative influences, leading to what can be considered a "gold pit." As gold prices touch new highs, with market consensus returning to clarity, the presence of gold stock ETFs at lower valuations creates a prime window for entry.

Risk Warning: The opinions presented in this article represent personal viewsThe mentioned financial instruments are not recommendations; trading based on this information incurs personal risks.