Profiting From a Divergence Between Gold and the Miners

Includes: GDX, GG, GLD
by: StreetAuthority

By Nathan Slaughter

I have a chart I have to show you.

Every once and a while, an opportunity like this appears. There's no way to predict when it will happen. You simply have to be vigilant. The good news is that vigilance usually pays off. I last saw this opportunity in late 2008, when the markets were pricing in economic collapse. Back then I was able to double my money in seven months.

Let me explain...

When gold prices are on the rise, shares of the companies that dig up the precious metal often rise alongside. After all, they are getting more money for their product while the costs to mine it stay the same.

But look closely at what's happened in the past month or so:

Gold has been shining brighter than ever lately. Buoyed by fears of the debt debacle in Europe, the metal topped $1,549 per ounce in the week of June 6.

But at the same time, gold miners (whose performance is shown here with the Market Vectors Gold Miners ETF (NYSE: GDX) have been pulled in the opposite direction, along with the broader market.

In other words, gold is rising, but the companies that sell the stuff have seen their shares slashed by about 15% since the beginning of May.

You occasionally see disconnects like this when the markets are nervous. Investors simply get scared and look to sell anything, with no regard for the fundamentals.

The last time I spotted a situation like this was in November 2008 -- in the middle of the big sell-off. Here's what it looked like... and what happened after:

I added GDX to my portfolio and cashed out exactly a 100.0% gain seven months later.

I'm not necessarily predicting a repeat of that performance -- the disconnect back in 2008 was much larger, meaning the miners had more to gain.

If you want exposure to gold, now's a great time to consider Goldcorp (NYSE: GG). The company maintains the lowest costs in the industry ($274 per ounce), and has boosted its gold reserves by 23% last year to a whopping 60 million ounces.

Yet, while the company's earnings prospects look better than ever, Goldcorp's price tag has been cut more than $6 billion since the beginning of May.

Disclosure: Neither Nathan Slaughter nor StreetAuthority, LLC hold positions in any securities mentioned in this article.