This Week in Gold and Silver

Includes: GDM, GDX, SLV
by: Hard Assets Investor

By Brad Zigler

Well, my luggage belatedly arrived after this week's trek to the Hard Assets Conference. And the technical whizzers that keep this site running are indicating that my conference presentation on hedging gold stock/fund volatility will be put up as a feature next week.

Check back at to see it.

So how did gold do this past week? Well, the answer depends upon your definition of gold. Bullion, measured by the London morning fix, eased 0.7% for the week ending Thursday. Gold mining shares, however, ended the week on a modestly positive note. The PHLX Gold/Silver Index (PHLX: XAU) eked out a 0.1% gain while the broader AMEX Gold Miners Index (AMEX: GDM) picked up 0.2%. On the futures side, bullishness waned on COMEX as large speculators liquidated 4,168 long-side positions. Commercials, on the other hand, added 5,514 contracts to the short side.

A week's price history, of course, tells us little. The longer-term picture provides an interesting insight. Market leadership shifted to large speculators in late 2007, presaging the run-up to new highs in gold's price. Large speculators include institutional traders and funds. While the level of bullishness has backed off since the March price peak, market dominance can still be claimed by bulls.

COMEX Gold - Price vs. Commitments Of Traders

If you hold gold mining stocks as your exposure to the metal, you've been paying a high volatility price. Since January 2005, gold stock prices, measured by XAU, have grown at an annual compound rate of 22.3%. Bullion, basis the London morning fix, has appreciated at a 23.8% clip over that time. Pretty similar returns, but my, my ... mining stocks have been a real roller coaster ride. Annualized volatility for XAU is 34.5% compared with 19.5% for the metal itself.

Gold - Bullion vs. Mining Stocks

While gold and mining shares, at any given time, seem headed in the same general direction, there are times when bullion's the better performer and others when stocks fare best. This ought to be a time when stocks outperform metal. But keep the word "ought" in mind. It's a suggestion, not a guarantee.

Translated into real-world terms, the Market Vectors Gold Miners ETF (AMEX: GDX) rose 0.3% last week, while the streetTRACKS Gold Shares (NYSE Arca: GLD) lost 0.3%. Bullion's loss translated into a 0.9% weekly gain for the DB Gold Double Short ETN (NYSE Arca: DZZ). On the silver side, the iShares Silver Trust (AMEX: SLV) countered with a 0.9% loss. This week, the gold/silver ratio fell 0.8% to a 52.2 multiple. Holding 1-to-1 long positions in SLV and DZZ this week would have resulted in a 0.6% loss.

Gold/Silver Ratio