Gold Stocks Not Driven by Larger Market

By Brad Zigler

Real-time Monetary Inflation (per annum): 7.8%

The gold/gold stock ratio scored an interim low Monday as the broader equities indexes made large gains.

Bullion, represented by the SPDR Gold Shares Trust (NYSE Arca: GLD), just couldn't keep up with the stocks comprising the Market Vectors Gold Miners Index ETF (NYSE Arca: GDX). GDX shares shot up 6% by Monday's close, while the GLD trust ended the day with less than a 2% gain.

Gold (GLD)/Gold Stock (GDX) Ratio

With its 3.4% gain, the broad-based S&P 500 stock index covered only half the ground taken by miners. That's not surprising when you think about it. After all, there are a lot more stocks in the blue-chip index; only 28 issues make up the GDX portfolio.

Despite the apparent outsized volatility of gold stocks Monday, miners have actually been less risky than the broader market this year. Compare the performance of the miners ETF to the S&P 500-tracking S&P Depository Receipts (NYSE Arca: SPY): SPDRs only turned positive for the year on Monday's action, eking out a 0.7% gain. Year-to-date, GDX is up 3.4%, and has at one point been up as much as 14%.

Those gains have been realized with vastly disparate risks. The standard deviation of daily returns for the S&P tracker is one and a half times greater than the gold stock ETF's.

Gold Stocks (GDX) Vs. Broad Market (SPY)

You can forgive the holders of gold stocks, then, if they seem a little smug compared with other stock investors.

There's something more important in the chart above. Though gold stocks and the broader market seem, at times, to be moving in the same general direction, they're not well-correlated. The r² (r-squared) coefficient for year is but .01, meaning just 1% of GDX's price action can be explained by SPY's movements.

This is a telling clue. People aren't jumping into mining issues because stocks are in favor; something else is driving interest in the miners.

This week's earning releases for Yamana Gold, Inc. (NYSE: AUY), Kinross Gold Corp. (NYSE: KGC), Goldcorp, Inc. (NYSE: GG), Royal Gold, Inc. (Nasdaq: RGLD) and Gold Fields Ltd. (NYSE: GFI) may go a long way toward explaining their attraction.

Comments

[GMiki1:]

Smug? Not really. And I hold GG--have done for quite a long time and didn't buy anywhere near the top. I do believe in the stock, but I haven't made any money yet. So, smug? No. Someday soon, probably, but not yet.

May 05 07:05 PM

[Roger Knights:]

Smug-one here: because I hold Seabridge (SA).

May 05 07:23 PM

[Sakata:]

In response to the first two comments:

I bought a bucketful of about 50 pink sheet miners back at the end of October when they bottomed out. So far I have had 17 which doubled and three of those tripled. I had a few losses of course, but I am up 43% on the bucket load.

But am I smug? Not even close! GDX is up even more (do hold a sizeable junk of that also) so I probably could have done better. I also have quite a bit of physical silver and gold and they are up more than the pink sheet stocks.

So what is the point of this post? It really doesn't matter how you are positioned in the mining and metals sector. As long as you are in it then you made a whole lot more than anyone else over the last six months. And you are going to make a lot more in the coming years. So let's not get hung up on small, short-term changes. The wise people are in this for the long haul and don't worry about what happens over a relatively short six-month period.

May 05 10:04 PM

[doubleguns:]

I'll be smug as much as I want when I am retired and living fine on these gold investments. I expect to break even or lose money on my other investments that are OH .....ABOUT 40% down or more.

10 more years and smug as a bug in a rug.

May 05 10:55 PM

[Brad Zigler:]

But it DOES matter. Perhaps not for you, but certainly for those yet to acquire an interest in gold. For them, the differential performance potential of gold stocks versus bullion is VERY important.


On May 05 10:04 PM Sakata wrote:

> In response to the first two comments:
>
> I bought a bucketful of about 50 pink sheet miners back at the end
> of October when they bottomed out. So far I have had 17 which doubled
> and three of those tripled. I had a few losses of course, but I am
> up 43% on the bucket load.
>
> But am I smug? Not even close! GDX is up even more (do hold a sizeable
> junk of that also) so I probably could have done better. I also have
> quite a bit of physical silver and gold and they are up more than
> the pink sheet stocks.
>
> So what is the point of this post? It really doesn't matter how you
> are positioned in the mining and metals sector. As long as you are
> in it then you made a whole lot more than anyone else over the last
> six months. And you are going to make a lot more in the coming years.
> So let's not get hung up on small, short-term changes. The wise people
> are in this for the long haul and don't worry about what happens
> over a relatively short six-month period.

May 05 11:09 PM

[DONE_SONZ:]

I f the economies are starting to turn up,massive inflation is on the horizon.If the economies are not,then more money printing , bailouts, and debt defaults.There is the interest.Smug soon enough.

May 06 08:06 AM