Gold: Officially An Underperforming Asset For The Foreseeable Future

Includes: ABX, AUY, GG, GLD, NEM, SLV, SLW
by: George Kesarios

I am assuming most of you know my opinion about gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV) by now. Gold's value is in the eye of the beholder and does not conform to the known investment metrics that we all know when it comes to valuing securities or stocks. As such, gold can be priced whatever the market thinks it's worth, for any variety of reasons whatsoever.

For the past 12 years or so, gold has performed better that equities and all those who correctly bought the barbaric metal have done well. However, the last couple of years gold has done nothing and this year gold will end with a down tick compared to last year.

And as things stand, I think we can officially say that gold and silver will no longer be outperforming equities, for at least several more years to come. Let me explain.

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As the chart above shows, the Dow/Gold ratio is pointing upwards. This means that we officially have a trend (several months ago I was hinting for a bottom in this chart). And this trend says that equities will be outperforming gold for the foreseeable future. For how long equities will perform better than gold is unknown, but the trend in the above chart will give us a hint when this relationship changes in the future.

However, one thing must be very clear to investors. This trend does not last days or months, but years and decades.

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Over the past 200 years or so, there have been 4 very big swings in this performance relationship. So with history as our guide and if history repeats itself -- even slightly -- this means that equities will be performing better than gold for the foreseeable future.

Please note that the Dow/Gold ratio does not necessarily mean that gold will go further down, just that equities will perform better.

Is it possible to see a reversal in this trend soon? Sure, anything can happen, however we have to keep an eye on the ball and verify the trend reversal if and when it happens. And one of the best ways for investors to do this is to keep an eye on the Dow/Gold ratio.

Gold is only a psychological deterrent for gold stocks

As for the miners, many of the big cap names like Newmont (NYSE:NEM), Goldcorp (NYSE:GG) and Barrick (NYSE:ABX) are trading at decade lows, and others like Yamana (NYSE:AUY) and Silver Wheaton (NYSE:SLW) have given back most of their decade gains.

And psychologically at least, I will agree that the price of gold is a headwind for gold stocks, if not a deterrent for most investors.

However, please note that most gold stocks have not followed the rally in gold to begin with. This means that when buying gold miners, we have to look at the fundamental metrics that define value, such as earnings, sales, cash flows etc.

As such, I do not hold gold miners hostage to the price of gold. If an individual company performs well, the price of their stock will go up, irrespective of the price of gold. This means do not look at the price of gold to see if you should buy a miner, but the investment metrics of each miner.

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.