Given yesterday’s slide across the board, profits in all three trading positions that are featured in my Gold Trading Alerts increased further.
They are increasing also today, especially the one in FCX (which is down 1.27%) and the short position in the new asset, which is down by 1.38%. The remarkable thing about this last trade is that it became profitable immediately, and it’s been becoming more profitable each day since we featured it (last Wednesday).
Okay, enough about that, let’s move to the key topic of today’s article, which is the long-term strength (lack thereof) of gold stocks relative to gold. Everything that you read below is based on what I sent to my subscribers on Tuesday – which was before the ratio plunged even more.
In order to analyze how gold stocks are doing relative to gold, let’s zoom out to filter the noise, and check the performance of the HUI Index (proxy for gold stocks) to gold ratio.
The key thing is that the gold stocks to gold ratio remains in a long-term downtrend.
Let’s state it one more time, as the message sometimes gets watered down.
Gold stocks to gold ratio remains in a long-term downtrend. In other words, gold stocks continue to underperform gold despite some short-term corrections.
Yes, mining stocks are undervalued, but… Compared to what? Well, historical norms, of course. The HUI Index (proxy for gold stocks) is even cheaper relative to gold than it was at the 2000 bottom!
Some may say that this alone is proof that they have to come back up with a vengeance now or soon. Let’s break it down to two points:
- Gold stocks have to come back to full strength relative to gold.
- It’s going to happen now or soon.
I disagree with both.
As for the first point, we are indeed likely to see more strength in gold stocks compared to gold after another major (THE?) bottom in the precious metals sector. Mining stocks, after all, tend to perform best in the initial parts of the upswing.
But will they get as high relative to gold as they were between 2003 and 2008? I doubt that. The reason is that the world is not like it was back then, and it’s unlikely that it will get back. Sure, if it was just about fear or greed (which would apply with a regular price chart), then the analogies to past would make sense. But in the case of the ratio, it’s not necessarily about fear or greed only, but mostly about fundamental changes that are present on the market.
One of the changes is the increased popularity of leveraged ETFs, which provide leverage to gold or silver price movement with greater precision than gold or silver stocks do. Those instruments are not going away – this is a lasting change and a part of gleam that miners are unlikely to regain.
The second change is the emergence of cryptocurrencies (including shit-coins alt-coins). For the investment public, this is a much sexier alternative than junior mining stocks, where one might need to wait for the results of drilling operations, etc., for many months. An alt-coin can soar in a week. And bitcoin – the “new gold” – has all the cool and interesting properties (shhh… don’t look at the quantum computing development that could calculate bitcoins in a flash, thus making its price plunge) that drive investor’s interest away from old boring mining stocks.
Will the interest in cryptocurrencies go away? I doubt that. Ok, maybe the growth of quantum computing will destroy the market, but it’s unlikely to happen anytime soon.
So, no, the ratio between gold stocks and gold doesn’t have to get back to the previous historical norms, and the odds are that it won’t get back there.
And even if it were to happen someday, we have no major indications, at least not from the above chart, that this would be likely to happen soon. The medium-term downtrend remains intact. What is more, the price moves in recent years are similar to the price moves that preceded the 2013 plunge. So… instead of a big comeback, a big decline is more likely to materialize in the medium term.
Yes, the ratio will likely launch a major medium-term rally (and you don’t want to miss it given that miners tend to outperform in the early parts of the big rallies – remember early 2016), but that’s likely to happen only after a major bottom in the entire precious metals sector forms, and for this to happen, the price needs to significantly decline first.
Fortunately, there are ways to profit from it while we wait on this superb buying opportunity in the mining stocks.
Thank you for reading today’s analysis. If you liked it, and would like to stay notified about new ones being posted completely free, I encourage you to sign up to my free gold newsletter today.
Thank you.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief
P.S. The precise profit-take level for the trade in the GDXJ, FCX as well as the details of the new trade (with even greater potential in the near term) are things that I’ll reserve for my subscribers and I encourage you to join them today.