Gold’s recent rise has been dramatic, pushing from $1,400 to over $1,850 since the beginning of the year. However, gold miners have not been along for the gains. The NYSE Gold Miners Index is at about the same level as it was in January. The divergence between them indicates that gold stocks will probably perform better than gold.
Generally, gold and gold stocks have a fairly close correlation. Although gold stocks are more volatile than gold, they normally follow the same trends. So when they diverge widely, as in the present case, they will likely converge back together again.
A good way to look at the divergence is to examine the ratio of gold to gold stocks. When this ratio is increasing, it means that gold is outperforming gold stocks, and vice versa. Below is a chart of the ratio of the price of gold to the NYSE Gold Miners index. As you can see, the gold to gold miners ratio is currently at a point which has only been surpassed a few times. Each of those times, gold miners substantially outperformed gold over the next year.
Overall, gold miners seem to be a better choice than gold at the moment. There is more potential for gains, and less risk of a downturn. A simple way to invest in gold miners is to buy an ETF that focuses on this sector, such as the Market Vectors Gold Miners ETF (GDX), PowerShares Global Gold & Precious Metals (PSAU), or Global X Pure Gold Miners ETF (GGGG). Or, if you don’t think gold stocks are headed up, buy a gold miners' ETF and short a gold ETF. This way, it doesn’t matter which way gold stocks are headed; as long as gold stocks outperform gold, you will make money.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
