Gold Stocks Underperform

Wednesday March 21, 2012

Gold Stocks Underperform Gold

This is a ratio chart of the XAU index of gold stocks divided by the price of gold. It tells us that gold stocks have underperformed the price of gold-by a wide margin. 

GDX

GDX the index of large cap miners such as Barrick and Goldcorp is trading at the same price it did in 2008. Gold in 2008 was less than $1,000, today it is $1,651!

There are numerous articles speculating what this means. Do investors in mining shares doubt the sustainability of the gold price?  Are investors just more interested in owning the metal?

My answer to the last questions is an unqualified YES. Let's replace GDX with Central Fund, a closed end fund that holds the literal gold and silver bullion.

CEF

Here the rise in CEF from 12 to 22 closely tracks the rise in gold from 1,000 to 1,651. Investors want the real thing.  Recall that I recommended both GDXJ and CEF in late December. 

So, let's telescope in a bit closer on CEF as to where it might just become a good buy.

CEF Daily

Right now the blogs and webs are alive with various 'experts' gleefully announcing breakout, for the NASD in particular. But one can look at this chart and see that buying upside breakouts is a fool's game. One needs rather to have bought the breakdowns in July 2010, October 2010, and December 2010. 

Seems to me the best estimate here would be to buy what others disdain. Orders below this point for CEF ought to be entered in succession for lower and lower prices. If CEF were to trade below 20.5, no doubt a slew of sell orders would be activated, as apparently happened in late 2010. That was a great buy. It was not a sell signal. The availability of computer software has really reversed what one needs to be doing these days. Downside breakdowns are more often than not, buy signals. Upside breakouts are a signal to let the late comers have whatever it is. 

Yesterday Bernanke was campaigning against the gold standard. Who would want to give up the ability to fight unemployment he said?  Apparently none of the 50 million people on food stamps were there to answer that question. Or to observe that the 1966 Chevy which cost $3,600 today costs $26,000. That is a result of cheap dollars, not an increased living standard. The governments of the world are one gigantic GM always rolling debt over and never retiring any of it. Hence investors are literally going for the gold, the hard metal. 

At yesterday's close CEF traded 3.3% above its Net Asset Value. 

Comments

[StuartD]

I must confess- I have ignored the gold/stock price moves but you raise some interesting observations. I see that Google\trends search on 'gold price' does show the interest level to be at the lower end of the range compared to the last 12 months. Interest in 'gold price' peaked in July-Sept 2011 but has remained lower since then. Looking back there does seem to be an inverse correlation with stock market tops and lower search levels which might be expected from investors.

On that note- I do see a slight uptick in the Google\trends search on 'stock market top' even though it is neutral/down so I might expect market moves higher until this ticks down again. Generally all search report keywords are entering or are in the 'top' zone compared with the last 12 months of report data.

[Dennis Elam]

Stuart

These are interesting observations, please keep them coming. As I observed a few days back, there is not a great deal more to say but I was surprised myself in how much CEF has outperformed GDX.