Monthly Archives: October 2013

Is it better to invest in Gold or Gold Miners?

Even after its significant recent decline, it’s interesting to see that over the last seven years, gold has doubled in price, while the over the same period, the gold miners, as a sector, has declined.

In the charts below, the top chart, Gold is represented by the gold tracking SPDR Gold Shares ETF (GLD), which trades at 1/10th of the actual gold spot price.  The index, representing 1/10 gold spot price was around $60, meaning told was at $600/ounce in 2006.  It nearly tripled to $180 and has come back to be at $120, double its early 2006 price.

The lower chart shows the miners index as represented by the GDX Market Vectors Gold Miners ETF.  Over that same seven years the miner index is currently down from $40 to $24, nearly a 40% decline.

Gold vs GDX Gold miners over the last 7 years

Per my previous article on the exponential profitability of the gold miners as the price of gold raises beyond the miners expense level reasons, you would think that if the gold miners were at one value seven years ago and gold has doubled, the miners would be at a higher level today, possibly even an exponentially higher value than seven years ago.

However, if you look at the chart below which starts from the major dip in mid 2008, you’ll see that the miners can exponentially outperform the the price of gold when coming off of a deep decline.

Ratio of gold to gold miners since mid 2008

The blue line in the chart above represents the miners and the red line represents gold.  You can see that around mid 2011 the gold miners were drastically higher than gold; nearly 120% higher.

The reason that gold has outperformed the miners over the last seven years is because gold had just come off of a major increase seven years ago so the miners were already blown up to a peak. Take a look at the action starting at 2011 in the charts above to get a visual feel for how this same thing happened starting in 2011.

Golds recent decline has really hit the miners extremely hard and they have come exponentially down because both the declining action of gold and the negative market sentiment of the miners have weighed on the miners (see my article on whether gold mining stocks move in relation to gold or market setiment).

This is the cycle.  Gold springs up and the miners jump exponentially higher.  Gold goes down and the miners shoot exponentially lower. We are currently somewhere in a big decline that has brought the miners exponentially downward.  Depending on where you buy, you’ll get very different results.

Thus, based on the above charts, if one wanted to invest in gold or gold related investments and was to ask me which would be a better investment, I would have two answers.  If you were choosing to invest at any random time without previous or current knowledge, I would suggest you invest in Gold as it is more stable over the long haul.

However, today’s current timing presents a major buying opportunity, in that we are currently in a very large decline that is setting up for the miners to exponentially outperform gold as happened from 2008 to 2011.  So if one were to include past and current analysis in to account, I  would suggest that at this current time, one should be purchasing gold miners.

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Do Gold Stocks move with Gold or the Stock Market?

I recently came across an article that referred to research that, over the long haul, 50% of Gold Miners price moves are based on the price of Gold and the other 50% is based on the stock market.

The article doesn’t go into what it means to move “based on the stock market”, but the author comes to the conclusion that if you are in the Gold miners to get an amplified move on Gold the historical odds are against you.

I though that was a pretty poor conclusion to obtain from that research.

First, of course Gold miners aren’t going to move 100% perfectly in an amplified manner to the movement of Gold.  It seems logical that some portion of the movement in miners is going to be based on the business of mining gold as well as market sentiment of the sector (read my article on how market sentiment affects the gold miners).

I interpret this 50/50 research to help strengthen the argument that now is the time to be getting into the gold miners as both sides are strongly pulling down on the gold miners.  The price of gold is falling, so right now, the miners are less profitable.  Because the price of gold has dropped so much, miners are less profitable and the market sentiment towards mining stocks is incredibly low.

Below is a chart of the ratio of the Junior Miners vs the relative price of Gold (as reflected by the Spider Trust GLD which virtually tracks the price of gold).

Radio of GDXJ to GLD (gold) over the last 3 years

Notice that the ratio of Junior Miners to the price of gold has drastically decreased over the last 3 years.  That means that Gold has drastically outperformed the Miners. Or you could say that Gold’s decline has been amplified in the miners.  If the two move perfect correlation without any amplification the ration would stay the same, and there chart would show a line straight across the graph.

Below is a graph of the ratio of Gold Miners to the Dow Jones Industrial average:

Ration of Gold Miners to the dow jones industrial average over the last 3 years

This graph also shows that the Junior Miners have significantly underperformed the Dow Jones Industrial Average.  Again, if the miners were in perfect correlation with the Industrial Average, the graph would be a straight line across the page.

So there’s a double witching happening.  Both portions of the “50/50” research outcome are working against Gold.  So when the turn around in the price of gold comes, there will be a double amplification in the opposite direction to keep the 50/50 rule in tact.  That will spell monster gains for the Miners as the sentiment will turn around and not only will the lost ground need to be recovered but the euphoria in the opposite direction will be required to compensate for the lost ground over the long term.