Junior Gold Stocks Benefit from Stabilizing Equity Markets

 |  Includes: GDX, GLD
by: Chris Vermeulen

With the Stock Market Panic behind us - for now - we are settling in for a range bound, relatively calm, second half of ’08. Junior Gold Stocks should finally start to benefit as the wet blanket smothering equity markets lift.

The New York Stock Exchange indicator for new lows reached an extreme of 1304 on Tuesday, July 15th. That was even worse than the 1100 new lows reached on January 22nd. Such extremes spell one thing: P-A-N-I-C.

While it’s difficult to infer any far reaching conclusions about one day sell-offs, even panics, the odds now favour a bounce in very oversold equity markets. As for how high and how long the stock market will bounce is anyone’s guess, but here again, probabilities favour the market to move higher and longer than anyone expects so that sentiment indicators return to their old complacent Bullish state!

What will work during this period of ‘relative’ calm? 

We had noticed a very definite flight to safety since market volatility began in October ’07.

Firstly, a flight away from common Dow stocks to Gold Stocks:

(The following charts show relative performance of asset classes to each other. That is, when the chart is falling the first asset class [DOW] is underperforming against the second (Gold Stocks).

Chart 1 - Large Cap Gold Stocks (NYSEARCA:GDX) have outperformed the Dow (NYSEARCA:DIA) since August 2007

Within the Gold market this has manifested itself as a flight to bullion and away from Junior Gold Stocks:


Chart 2 - Gold Stock ETF has underperformed against Gold Bullion ETF (NYSEARCA:GLD) since August 2007

And a shift from smaller more speculative junior Gold mining companies to their large caps cousins:

Chart 3 - Minefinders (for example) has under-performed against the large cap Gold Stock ETF

Now that there is a good chance equity markets will stabilize, the above trends will moderate and reverse. This means Junior Gold stocks prices should begin closing the valuation gap and discounting higher earnings based on $900+ Gold.