Look! A Gold Turnaround! (Not)

By Brad Zigler

Wanna see the makings of a market turnaround? Peer closely at the zenith of the black line in the accompanying chart. Zoom in REAL close and you'll note a little arc. See it? There; that's it.That's the turnaround some pundits want you to see.

Bullion/Mining Stock Ratio

There was a break in the devolution of gold mining stock prices Wednesday. The black line represents the ratio of gold's price, tracked by SPDR Gold Trust (NYSE Arca: GLD) shares, to the price of the Market Vectors Gold Miners ETF (AMEX: GDX), an index fund representing some three dozen gold mining stocks. Yesterday, equities popped while bullion pooped. In a volatile session, GLD shares gave up 3%, while GDX gained 3.5%.

The turnaround, if that is what it indeedwas, seems long overdue (then again, what isn't overdue in this market?). As you can see, the ratio's been racing upward with increased velocity recently, much to the chagrin of stockholders who've been awaiting a chance to outdistance bullion since November 2007.

We've looked at the ratio in several articles, the most recent being "Gold Ratio Guru?", in which option maven Larry McMillan's GDX/GLD option spread was updated. (For aficionados, the spread, bought at $16 or less, was worth $14.85 at last look.)

If you like ratios (who doesn't?), take a gander at the action in the gold/oil fraction. Oil's recent sell-off has been even harder, dollarwise, than gold's. An ounce of gold can now buy 7.6 barrels of oil; in June, gold fetched only 6.4 barrels.

Gold/Oil Ratio

So, relatively speaking, gold's stronger than oil and maybe, just maybe, gold stocks are poised to outdo bullion. Does this justify buying gold stocks here? Too early to tell for sure, though some investors might opt to trade the spread, rather than buying stocks or a fund outright.

If the spread's short GLD leg is discomfiting, there are the DB Gold Short ETN (NYSE Arca: DGZ) and the DB Gold Double Short ETN (NYSE Arca: DZZ) notes available to counterbalance a long GDX stake.

Comments

[Kelly Liebe...:]

and yet....MSN reports:

The biggest single buyer of gold right now is likely China's central bank. China had amassed $1.8 trillion in official currency reserves by the end of June, much of it in U.S. Treasurys. Though the U.S. dollar has regained some strength lately, the International Monetary Fund, Warren Buffett and others still see the long-term trend as down. That's a big reason China watchers think the country is converting some of its cash into gold.

Map: World's largest gold buyers and sellers

China reported 600 metric tons of gold reserves at the end of June, or 1% of its total cash reserves. At today's prices, that's about $16 billion worth, or about 20 million ounces, less than half a percent of the estimated total gold in existence. Though Beijing is not reporting any addition of gold to its official reserves, some analysts at top trading and investment management firms believe China is quietly buying gold to diversify out of the dollar.

What we do know for sure is that Chinese citizens are increasing their purchases of gold. In 2007, Chinese retail investment in gold rose 63% to 32 metric tons, according to the Shanghai Gold Exchange, as China supplanted the U.S. as the second-largest consumer of gold. Also in 2007, China ended South Africa's 102-year reign as the largest gold producer in the world, taking the top spot as its production rose 8%, according to GFMS, a metals consulting company in the United Kingdom.

"Chinese consumption is growing," says Bill Reynolds

Something fishy afoot???

2008 Sep 11 03:36 PM

[User 30121:]

Heck no, Kelly, nothing fishy here. Just ask Gary North to explain to you why we (PM hoarders) are a bunch of dumbasses.

Oh, yes, he says that Ted Butler, Jason Hommel et al, also are (like us) dumbasses.

When the rest of the SHEEPLE out there realize what our elitist government manipulators, and the China's of the planet are doing, it will be TOO LATE for them to join us in becoming gold/silver hoarders!

2008 Sep 12 01:13 PM

[Smarty_Pants:]

Oops. Seems this article was a few days too early.

Lehman sinking, AIG worried, dollar falling, gold and commodities rising. Wait until the FED starts printing in earnest and see what happens.

Got gold?

2008 Sep 14 11:06 PM