Whither Gold Stocks?

By Brad Zigler

If you've been looking for bright spots in this dark equity landscape – and who hasn't? – you probably noticed a certain golden glint on the horizon.

Gold, measured by the share value of the SPDR Gold Shares Trust (NYSE Arca: GLD), is up 7.7% this year. The gold mining shares that comprise the Market Vectors Gold Miners ETF (NYSE Arca: GDX) have chalked up the same year-to-date gain.

Despite the numbers, the two exchange-traded products are hardly performance twins. Until recently, in fact, GLD flagged behind GDX.

That started in late October after the GLD/GDX ratio peaked at 4.4; that is, when GLD shares traded for more than four times the value of GDX. From there, mining shares started to shine as bullion stalled and stuttered. The ratio consequently fell as the relative value of the miners increased.

Now, with the ratio stalled at the 2.6 level over the past 15 trading sessions, people are starting to wonder "Whither gold stocks?"

Bullion Vs. Mining Stocks: GDL/GDX Ratio

GDX sold off hard from the $52 level back in July, taking just three months to scrape a bottom under $16. The ETF's been battling back since October and has now reclaimed half the ground lost in the fall. That puts an interim (month's end) target of $38 in view.

Market Vectors Gold Miners ETF (GDX)

Failing to close convincingly above the $38 level within the next couple of weeks turns the question of "whither" into "whether." At the very least, it portends more shoring-up work for mining bulls.

Comments

[User 357895]

It looks like GDX is a good pick from here to $50 according to TheGoldHedge.com

2009 Feb 16 11:20 AM

[goldtheory]

I recall in the 1978-1980 bull market in gold that the dollar and gold bullion got in sync and moved together to the upside. That is what seems to be occuring now. Also, gold stocks, at the same time, bolted to the upside. The mining stocks usually lead gold bullion rallies, but in 1980 after lagging, they not only caught up, but investors who leveraged those positions made a lot more money than their counterparts in bullion. Even after gold peaked, gold stocks continued to perform nicely. In my opinion, that's probably what we're going to see again.

2009 Feb 16 01:03 PM

[Brad Zigler]

You don't have to go very far back to see gold stock outperformance. From September 2005 to May 2006 miners appreciated at a much faster clip than gold. A more recent albeit briefer excursion was in the fall of 2007.


On Feb 16 01:03 PM Unexpected wrote:

> I recall in the 1978-1980 bull market in gold that the dollar and
> gold bullion got in sync and moved together to the upside. That is
> what seems to be occuring now. Also, gold stocks, at the same time,
> bolted to the upside. The mining stocks usually lead gold bullion
> rallies, but in 1980 after lagging, they not only caught up, but
> investors who leveraged those positions made a lot more money than
> their counterparts in bullion. Even after gold peaked, gold stocks
> continued to perform nicely. In my opinion, that's probably what
> we're going to see again.

2009 Feb 16 01:44 PM

[silver-bullet]

If anything, the risk-reward ratio currently favors making bets (though not big ones) that the monetary metals could correct, perhaps even severely.

2009 Feb 18 02:39 AM

[Brad Zigler]

The 18-month reward-to-risk ratio (volatility vs return) for GDX is -.04; for GLD, it's +0.50.

By what process are you assessing ratios?


On Feb 18 02:39 AM silver-bullet wrote:

> If anything, the risk-reward ratio currently favors making bets (though
> not big ones) that the monetary metals could correct, perhaps even
> severely.

2009 Feb 18 10:00 AM