In the complex world of finance and investments, the relationship between commodity prices and stock values generally follows a well-trodden path, particularly in cyclical stocks. Typically, when commodity prices rise, the performance of associated companies improves, leading to a subsequent rise in stock prices. However, the recent performance of gold stocks has presented a perplexing anomaly that diverges from this established pattern.

Over the last few months, the global geopolitical landscape has intensified, and there has been a growing expectation of interest rate cuts from the Federal Reserve. In response, the price of gold has undergone a pronounced V-shaped recovery since being dramatically reduced during the National Day holiday. Within just two months, the fundamental price of gold in China soared by 10%, indicating a significant resurgence in value. Yet, counterintuitively, the stocks of companies involved in gold production and sales, commonly referred to as gold stocks, have instead experienced a decline. Major players in the market, including Zhongjin Gold and Chow Tai Fook, reported decreases in their stock prices, with some, like Chow Sang Sang, suffering a staggering drop of over 12% during the same period.

This divergence between gold prices and the corresponding stock prices of gold companies has raised concerns within the investment community. There is a prevalent fear that rising gold prices may not be effectively translating into increased profits for these companies, thereby hindering stock performance. Such apprehensions are not unfounded; despite a significant increase in retail gold prices—approximately 6% from early June to the end of September—the profit margins for leading gold companies have actually contracted during the same timeframe. For instance, Chow Sang Sang reported a year-on-year decline in gross profit margin of 0.1 percentage points, while Zhongjin Gold's gross profit margin fell by 0.3 percentage points compared to the previous quarter.

As it stands, the upward movement in gold prices has yet to result in corresponding improvements in corporate profitability. Consequently, any anticipated rise in stock prices for gold companies seems unlikely. Analysts have put forth several hypotheses to elucidate this troubling trend:

Firstly, there is a clear indication that profit margins for gold stocks are undergoing a critical turning point. Initially, when gold prices surge, companies tend to increase their selling prices, leading to improved profit margins. However, this same surge in gold prices catalyzes inflationary pressures that escalate operational costs linked to mining, procurement, and transportation. As these costs rise, they create a compressive effect on profit potential. Hence, after enjoying the benefits of heightened gold prices, many gold stocks are now facing an environment where rising costs are eroding profit margins.

Secondly, the operational leverage concerning gold stocks resembles a double-edged sword. Under a controlled quantity framework, the turnover for these stocks is predominantly influenced by gold price fluctuations, and they maintain relatively stable costs. This means that when gold prices rise, profits for these companies can double. Conversely, should there be a downturn in gold prices, the resulting decline in profits can be even steeper. Current fears in the market center around the possibility that once gold prices peak, there could be a rapid devaluation of gold stock profits.

Lastly, the volatility in stock prices does not appear to be synchronized with changes in gold prices. A historical review of gold stock performance reveals that in the early phases of rising gold prices, stock values expand at a faster rate, often outpacing the gold price itself. However, once cost pressures impact profit margins and the rate of increase in gold prices begins to slow, gold stocks tend to retract before other sectors.

We are currently witnessing a significant V-shaped movement in gold prices, especially exacerbated by escalating global conflicts that are driving heightened demand for safety assets. From early October to now, gold prices in China have rebounded dramatically—from 440 RMB per gram up to 480.5 RMB per gram, establishing new yearly highs. Under ordinary conditions, one would expect that rising gold prices would bolster gold stocks. Yet, in stark contrast, during this period of surging prices, gold stocks have plummeted, further substantiated by data showing that Zhongjin Gold fell by 9%, Chow Sang Sang by 12%, Chow Tai Fook by 7%, and others following similar trends.

The disconnect between rising gold prices and declining gold stock prices becomes more comprehensible when one considers the lack of assurance that these price increases will augment profits for these companies. As evidenced by recent quarterly earnings reports, the anticipated improvements in profitability have not materialized as expected. For instance, in the third quarter, while Zhongjin Gold experienced a price hike on its product, its profit margins dropped to 17.8%, showcasing a 0.1 percentage point year-on-year drop in gross profit margin. Therefore, numerous reasons exist that complicate the current predicament facing gold stocks.

In sum, the observed declines in profit margins from notable gold production companies signal a pivotal change in profitability expectations, indicating that the coping mechanisms of these companies are being tested. Historically, the peak profit margins for gold stocks have not necessarily aligned with peak gold pricing, revealing the discord between gold prices and profit margin peaks. For instance, the period from August 2018 to September 2019 saw the Federal Reserve reintroducing expansive monetary policies, which led to a sharp rise in gold prices by 28%. However, profitability for key players like Chow Sang Sang soared during previous price hikes, yet the peak gold prices in September 2019 coincided with declining profit margins.

Moreover, gold enterprises see the retail price of their goods closely reflecting gold prices. Initially, as gold prices surge, these sellers strategically hike their retail prices, which should theoretically inflate profits. However, with the correlation between purchasing power and inflation, the rising costs for mining and transportation relatively lag behind, establishing a delay that further complicates corporate financial strategies. Thus, oscillating market conditions and fluctuating costs create a cocktail of risk that renders gold stocks susceptible to significant profit alleviation should gold prices fall.

Currently, with increasing anticipation of interest rate cuts by the Federal Reserve, there are signs that the gold market may experience renewed vigor. On December 4, notable highs were reached in both New York gold futures and London spot gold, surpassing 2100 for the first time. This indicated a potential uptick in Chinese gold stock performance, with companies like Shandong Gold experiencing jumps exceeding 4% that day. The question remains: can this uptick sustain itself as external dissenting views, coupled with market uncertainty about the timing of the Federal Reserve's inflation responses, pose additional challenges? The volatility in gold stocks is fueled by uncertainty.

Ultimately, while momentous movements in gold prices spark excitement, investments in gold stocks remain precarious, highly contingent on further macroeconomic developments and the underlying robustness of profits. Investors should maintain a cautious perspective as we navigate through these turbulent waters, constantly recalibrating their understanding as new developments emerge.