Gold Stocks Rebound

By Brad Zigler

Gold was beat up again in COMEX trading pits Wednesday and wobbled through the overnight market to extend the decline. Still, spot gold is $24 an ounce higher than last week's finishing level. Some technical indicators are, in fact, flashing "bullish" now, though a close above $775 would be needed to confirm the presence of a short-term low.

COMEX Spot Gold

 

There's a much more dramatic story on gold's equity side. Lately, gold mining shares have rebounded dramatically in the wake of their wholesale dumping by speculative funds. In the past 1-½ weeks, gold issues tracked by the Market Vectors Gold Miners ETF (AMEX: GDX) have shot up more than 43%.

Whether this represents a coda to the drubbing gold stocks have endured this year remains to be seen. One thing is certain, though: Year-to-date, bullion's fared a lot better than gold equities. The gold-to-stock ratio, pitting the bullion-owning SPDR Gold Shares Trust (NYSE Arca: GLD) against GDX, more than doubled as financial markets have soured.

Some traders believe that bullion may have gotten ahead of itself, though it may not appear that way when the metal's regarded on a stand-alone basis. For the year, GLD's lost nearly 12%. GDX, however, has sunk 49%.

Bullion-To-Gold Stock (GLD/GDX) Ratio

The relative undervaluation or, more appropriately, underappreciation, of gold mining issues has been a burr under the saddle of many gold aficionados.

Perhaps it's finally time for stocks to shine, but investors shouldn't forget that gold mining issues are still highly correlated to bullion. As gold goes, so goes - more or less - mining shares. The correlation of daily price returns between GDX and GLD, in fact, stands at 73%, even after counting the seemingly disparate performance records this year.

The recent rebound in the U.S. disinflationary trend has been a balm for gold stock investors, though the cautionary advice of Van Eck portfolio manager Joe Foster ought to stay in the forefront of investors' minds (see "Golden Opportunities"): "We look for companies that are well-managed and have growth and can fund that growth."

Comments

[NOWHEREMAN:]

Looks like gold is on its way to the low to mid $600 range, this appears to coincide with the last cautionary statement:
.... have growth and can fund that growth ...

What rebound? The Bear market bounce, is that what you are talking about?

2008 Nov 06 05:07 PM

[iknoknot:]

i'd be interested in seeing the same graph with John Williams' shadowstats.com inflation numbers. It might only be a relative difference, but it would be interesting to know if there were any other interesting patterns.

tnx for the read,

--ikk

2008 Nov 07 03:58 AM

[Managing Ed...:]

Rebound? Yes, Paultaut, the rebound that caused the overextended GLD/GDX ratio to drop so precipitously.

Note the cautionary tone that was sounded in the piece : "...investors shouldn't forget that gold mining issues are still highly correlated to bullion. As gold goes, so goes - more or less - mining shares. The correlation of daily price returns between GDX and GLD, in fact, stands at 73%, even after counting the seemingly disparate performance records this year."




On Nov 06 05:07 PM paultaut wrote:

> Looks like gold is on its way to the low to mid $600 range, this
> appears to coincide with the last cautionary statement:
> .... have growth and can fund that growth ...
>
> What rebound? The Bear market bounce, is that what you are talking
> about?

2008 Nov 16 01:04 PM