It has been a while since I wrote an article on gold (GLD). In my last gold article, I hinted that gold might rally because of gold selling exhaustion. Gold has not rallied since then, however gold miners have.
And the importance of the run-up in miners is that -- according to me -- they will give us clues as to when gold might bottom. The reason for this -- as I have explained in past articles -- is that gold stocks are smarter than gold. Let me explain.
Mining stocks (gold or otherwise) adhere to the rules of investing as we know them (return on assets, EPS, dividend etc.). But gold's price is arbitrary, in the sense that it's worth whatever the market is willing to pay for it.
But when stocks feel gold might go up -- and thus they will make money producing gold -- then they rally.
So looking at what has happened since July 11 (the date of my last gold post), we see that gold miners have significantly outperformed gold. The bottom chart is the relative performance of gold compared to the top five holdings of the Market Vectors Gold Miners ETF (GDX): Barrick (ABX), Goldcorp (GG), Newmont (NEM), Silver Wheaton (SLW) and Yamana Gold (AUY).
What is so important about the miners outperforming gold you ask? Three things.
1) If I am correct -- as stated in previous articles -- gold miners will significantly outperform gold, if and when gold bottoms. As a result, the money to be made in gold stocks relative to gold, will be many times over. The above stocks I list are probably the ones to give the most money.
2) Since we don't know when gold might bottom (as I say above, its price is arbitrary and does not conform to known investing rules), following miners outperformance, will give us at least we a hint as to when gold might bottom. The reason for this is simply that gold cannot trade under the cost of production for very long.
3) Another important thing to note about the above chart, is that there is plenty of money to be made in the gold space for short term trades. There is more than one way to skin a cat, and you really don't have to be confined to gold to make money in the space.
And while 10 days of outperformance does not guarantee that this trend will continue forever, or that gold stocks will not correct in the future, it does give us a clue about gold. And that is, as long as gold stocks outperform gold, gold has probably bottomed or at least it will not be going down for the time being.
So in my book, the longer miners outperform gold, the more we can say with a higher degree of confidence that a bottom in gold is in. However, this outperformance has to continue for several months and not just days. But for now -- or until a change in my recommendation -- gold seems to be at some sort of bottom. However the money to be made is in gold stocks.