Weekend February 3 2013
An alert reader asks the following question.
Dennis, I compared GDX, GDXJ, GLD to the SPX for the last year. The metals trended down with the SPX to the Summer low, then moved with the SPX toward the Sept high and the Nov low. After Nov, metals diverged and continued down while SPX made new highs. My question is why would the metals turn and rally if we are predicting a major top in the near term? If they are so weak that they can not follow the SPX now with all the "euphoria", would they not struggle if the SPX tops out in the next few months and follow it down...? Thanks!
An alert reader who is this studious deserves a good answer. The answer is that most financial advisers recommend diversifying. But that turns out to mean that one owns a bunch of stocks which are in fact correlated as they all move up and down with the stock market. Gold and mining stocks however are not correlated with the stock market as our reader notes. In the 2008 debacle, metals made their low first and rallied while stocks made a subsequent low months later.
2008-2009 GDX versus SPX
GDXJ did not exist then so we are using GDX, the larger mining stocks. Notice that GDX bottomed in October. But SPX the black line continued down into March while GDX rallied from 17 to 35, a double, in the same time that SPX fell from 1000 to 666. That is rather amazing considering the gloom and doom at the time, everyone was throwing in the towel from January to March, but not on GDX!
Other reasons include the lowest valuation of gold miners to stocks since 2008.
GDX ratio chart to SPX
As stocks are at a high now I doubt GDX will fall to its 2008 level of disparity.
Or how about the lowest ratio of GDX to Gold in some time?
GDX to Gold
Again we have returned to completely out of whack 2008 valuation levels. Could this go on a bit longer as it did then, I don't think we are going back to those extreme levels but as the chart shows if so, it should not last long if that happens. Insiders at mining companies have been recent buyers of these stocks.
And if stocks in general fall as expected fund managers will look for something out of favor that is depressed for buying that would be the mning stocks.
Comments