As a reminder, I do not consider gold (NYSEARCA:GLD) proper for investment. The price of gold is mostly a function of investment demand, but investment demand for gold is a function of what the market thinks its worth, that does not adhere to the investment logic we all know.
However miners are a different story. Mining stocks are just like all other stocks and adhere to the rules investment, such as return on assets, sales growth, dividend payments and so on.
While I have been a gold and silver bear forever (please consider: Will 2013 Be The Year That Gold Dies?), recently I changed stance and became quite bullish. The reason had nothing to do with fundamentals, but because of selling exhaustion (please consider: Gold And Silver Might Bounce On Selling Exhaustion).
As I have reiterated over the past couple of articles, I prefer mining stocks compared to the metals. Reason being because mining stocks have been creamed over the years, and any upward move in gold will provide extraordinary returns for the miners. Well so far this bet has paid off.
The chart below shows the comparative performance of the top 5 miners by market cap since July 8 (on the 11th I called the miners). Since then, Silver Wheaton (NYSE:SLW) has returned 46%, Barrick (NYSE:ABX) 45%, Yamana (NYSE:AUY) and Goldcorp (NYSE:GG) 31% and Newmont (NYSE:NEM) 22%. And if you were a bit on the wild side, the Direxion Gold Miners leveraged ETF (NYSEARCA:NUGT) is up 100%.
The question looking forward is, do investors hold onto miners -- given the spectacular returns over this short period -- or do they take the money and run?
Well in order to answer this question, we have to answer another question: what will the direction of gold be in the future. And even though we do not know what gold will do, the market does give us some clues from time to time of what gold might do.
One possible catalyst for higher gold prices might be that new home sales came way below expectations recently. What does housing have to do with gold? Well the theory goes if housing comes back to life (as it has), it will be good for economy. But in order for that to happen, the Fed has induced record low mortgage rates to incite people to buy new houses. However, since rates have been going up lately, people did not buy enough houses to meet economist expectations and that might derail the U.S. economic turnaround.
So what I think is happening with gold, is that the market might be betting that the Fed will think twice before stopping or lowering its asset purchases going forward. And since recent history has taught us that a zero rate environment is good for gold, gold will probably do good as long as the Fed continues with its asset purchase program.
And any sign of future economic weakness -- poor home sales for example -- will probably be positive for gold.
And as long as gold continues to go up, mining stocks will also continue higher, and will outperform gold and silver spot prices by a long-shot.
If however we see gold correcting again, or miners correcting, even if gold hold steady, then we have to rethink this entire strategy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.