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In part one of this series last week, a number of factors were discussed in an effort to explain the underperformance of gold stocks relative to gold bullion in recent years, namely, the broad introduction of gold ETFs beginning in late-2004 and demand for the metal, not the shares, from Asia.

Also cited were the metal's stellar performance in 2008 when the price of nearly every other asset (including mining stocks) tumbled, a development that was attributed to the fact that gold stocks are, indeed, still stocks, subject to all the whims and vagaries of shareholder perceptions of value, and, more importantly, equity market sentiment during a period of increasing volatility in stocks.

In part two of this series today, we'll take a closer look at the three periods of interest identified last week - pre-2004, 2004 to 2008, and post-2008 - in an attempt to better understand this relationship and discuss its implications for one's investment portfolio.

To be sure, it has been a dismal period for gold shares as a quick check of the world's biggest gold stock ETF, the Market Vectors Gold Miners ETF (NYSEARCA:GDX), shows a year-to-date loss of almost 15 percent while the yellow metal, as represented by the SPDR Gold Shares ETF (NYSEARCA:GLD), sports a modest gain of just over 2 percent.

While the underperformance of gold stocks relative to the metal has been extreme since last fall when investors largely abandoned this sector, it has persisted for some time now and, a closer look at the relationship between the two using the GLD ETF and the HUI Gold Bugs Index (^HUI) going back to the launch of GLD in late-2004 shows two of the three distinct periods cited above.

One of the most important factors in this changing relationship can be seen to the left in the chart above when, with the introduction of the GLD ETF in December of 2004, the gold stock-to-gold ratio plummeted in early-2005.

The commodity market boom that followed in 2006 through mid-2008 kept share prices elevated until the financial market crisis led to a plunge in this ratio to historic lows in late-2008, an area that has just recently been revisited, importantly, absent a major financial crisis.

In the interim, a new range has clearly been traced out and, while many pundits continue to argue that gold stocks are poised for monstrous gains in the period ahead based on the historical relationship between the two, a smaller number of analysts (including myself) have been urging investors not to get too excited about gold stocks in this post-2008 investment world.

Simply put, expectations for gold stocks may be based on an era that has now passed us by and we may have entered a new phase in the relationship between gold and gold stocks, where gold stock underperformance is the new norm.

There is one very important case where gold stocks may outperform gold by a wide margin in the years ahead and that will be the subject of a subsequent installment in this series.

But, as it looks right now, while gold stocks are clearly at the lower end of their post-2008 range as shown in the chart above and, as a result, offer some very good upside potential, that upside may be very limited.

Many investors have been slow to realize that a major change has been afoot and none other than billionaire George Soros made the disastrous mistake of trading in nearly all of his hedge fund's GLD holdings early last year in favor of gold shares.

HSBC Global Asset Management followed with a similar move and had the same results, both of these asset allocation changes aimed at achieving a better return for investors in the mistaken belief that market risk was abating and that the gold stock-to-gold ratio was likely to return to its historical norm.

It didn't.

Now almost a year-and-a-half after these asset allocation changes, George Soros continues to add back to his position in GLD, nearly doubling his holdings of the ETF during the second quarter of 2012 per recent SEC filings.

As for the pre-2004 period, it's instructive to look at a longer-term relationship between gold and gold stocks using the Barron's Gold Mining Index from this January 2010 article at 321Gold.

This puts the matter into a much broader context and offers some confirmation of what had been suggested here last week - that gold stock "leverage" is, essentially, over, after having been based largely on several short-term trends, the most recent occurring early in the last decade.

(click to enlarge)

In fact, much of what has passed for conventional wisdom on this subject appears to have developed from 2000 to 2004, when, with the gold price at generational lows, the gold stock-to-gold ratio climbed steadily, leaving a lasting impression on investors.

The outsized gains for gold stocks that occurred in the early part of the last decade, notably the more than doubling of gold stock prices in just a couple years as depicted in a graphic last week, came at a time when you couldn't easily buy gold and investors did not fear a repeat of a financial market crash such as the one in 2008 when gold bullion shined and gold stocks plunged.

Of course, the decades leading up to the 21st century were largely consistent with what was seen early in the last decade, save for the the gold stock mania prior to 1975 when, since the Great Depression, ownership of gold bullion was illegal for U.S. citizens and investors had no choice but to gain gold exposure via the shares.

But, the long-term trend clearly seems to be down and, in a world with ever increasing risk and a newfound appreciation for the metal itself, that trend may not change.

All of this bolsters the decision to weight gold bullion much higher than gold stocks in one's investment portfolio, as has been the case for the model portfolio at Iacono Research since mid-2009.

Of course, carefully selecting gold mining stocks can produce returns that far outpace the increase in the price of the metal, however, that is much easier said than done and it's important to remember that those most bullish about mining stocks relative to the metal (and those proclaiming how extremely undervalued stocks now are) are usually the same people who have a vested interest in share prices going higher.

Let's be honest, buying and holding gold is boring.

It's been about the best investment in the world over the last decade or so, but it is boring.

But, if we ever see anything like a repeat of the 2008 financial crisis in the years ahead - an outcome that seems to be more likely with each passing day - wouldn't you rather be holding gold bullion than gold stocks?

Source: Gold Vs. Gold Stocks - Part II

Additional disclosure: I also own gold coins