Gold Stock on the Move

By Brad Zigler

Real-time Inflation Indicator (per annum): 10.5%

Noticed something? Take a look at the inflation number in the subhead above. The indicator's gone into double digits as the result of the Fed's recent move to cheapen the dollar. Gold, not surprisingly, responded with a gap-higher opening Wednesday and a fill-in trading session Thursday.

February COMEX gold has set itself up for a test of the $880 level, a price visited but not held on Tuesday. A close above $880 would be convincing evidence of bullish resolve to work toward the October reaction highs above $900. On the other hand, a close below $803 would indicate that a short-term top is in.

COMEX Gold (Feb. '08)

It's that "other hand" stuff that's so worrisome to gold aficionados.

There's been a lot more enthusiasm for gold stocks recently. Over the past trading week, mining issues proxied by the Market Vectors Gold Miners ETF (NYSE Arca: GDX) have gained 6.5%, while bullion has risen just 4%. The performance edge, in fact, has been held by gold equities for more than a month as bullion formed a base and started working higher. That can be visualized by comparing the relative performance of the SPDR Gold Shares Trust (NYSE Arca: GLD) to the Market Vectors portfolio. The bullion trust's price multiple has fallen from 4.1 to 2.8 since late November.

Bullion (GLD)/Gold Equities (GDX) Ratio

Of the Market Vectors ETF's three dozen components, Royal Gold Inc. (Nasdaq: RGLD) has been the strongest. And for good reason. Denver-based Royal Gold acquires and manages royalty interests in a variety of production, development and exploration stage projects worldwide. Strong fundamentals such as industry-beating cash flow-to-sales and current ratios, together with a steady dividend stream, have attracted interest in the stock. So much so that Royal Gold shares have appreciated nearly 38% for the year, with 20% less volatility than the Market Vectors portfolio.

Royal Gold Inc. (RGLD)

So, the big question remains: If Royal Gold has been noticed by investors, is its stock now fully valued?

If you're a "glass half empty" investor, you'd have reason to be concerned. After all, a 38% return in a market like 2008's is a gift. The "glass half full" folks, though, are looking at a short-term price objective of $51, another 18% in upside potential.

You can either raise your half-empty glass to bid farewell to 2008 or toast the new year with your half-full glass.

Enjoy your holidays.

Comments

[frigged:]

Miners leading the way--Gold down today--Miners up--
Bullish divergence---
S&P to 1080 Bear Rally--

2008 Dec 19 08:05 PM