Why Do We Need Gold Stocks?

I think this is a really interesting phenomenon that we’ve been watching for several years now. If an investor wants exposure to gold, it’s easy to get that through an Exchange Traded Fund. $GLD is my personal favorite and also the Gold ETF of choice for most traders. If you want some leverage you can go with a double like $DGP or a triple like $NUGT. So why would put your money in the miners and have to worry about fugazi African mines?

This is probably one reason why Gold Mining stocks have underperformed the actual precious metal for years. But the curious part of the whole thing is the secular underperformance we’ve seen that goes back to the mid-90s, before any of these ETFs existed. This chart from King World News shows the ratio of the Gold & Silver Index ($XAU) relative to the spot price of Gold over the last 3 decades:


Legendary Technician Louise Yamada had this to say about the long-term trend:

“The ratio between gold stocks and Gold the metal continues to depict the outperformance of the metal over the stocks (declining ratio line).  Having shared this profile over the years, now note the new relative ratio low following the structural 20-year breakdown that occurred in 2008.  The proliferation of the bullion ETFs allowed the public to hold the metal easily, and not have to be concerned with corporate earnings, nationalization of resources or environmental issues.”

I find this investor behavior fascinating and wonder if and when the miners will ever be back. This was a serious breakdown of multi-decade support. And Technical Analysis 101 teaches us that all this support should turn into resistance on any future attempts to get back above those levels.

Amazing stuff



Yamada: Gold & Silver At Critical Points In This Cycle (KWN)