Gold Vs Gold Stocks: Bullish Anomaly Developing?

Over the past few months, mining stocks have returned to offering excellent leverage to the advance in prices for precious metals. Yet, during the recent pullback, the downside leverage has been absent. This is atypical behavior as mining stocks usually lead the metals and generate leveraged gains (or losses). This could be a bullish development, suggesting that investors in mining stocks believe they have the seen the bottom and are unwilling to sell despite the recent dip in gold prices.  

Precious metals had a powerful start to the year, with gold climbing more than $100 and silver rocketing roughly $3 higher during the first three weeks of January.  But the rally has since faded with both metals giving back nearly all of their 2015 gains.

Gold 3

Silver 3

Mining stocks typically offer leverage to the movement in the gold or silver price. From the start of 2002 until the end of 2007, gold went up roughly 203%. During the same time period, the HUI index of mining stocks rocketed 547% higher.  That is leverage of roughly 2.7 times. You will notice that the leverage cuts both ways, as gold dropped 41% from the high mark on 9/06/11 until the 11/06/14 low, while mining stocks (HUI) fell by 77%. The leverage to the downside was 1.8x.

gold vs gold stocks

Anomalies pop up such as the period from 2008 to the end of last year. During this time period mining stocks were down 60%, despite gold being up 44%. So the positive correlation and leveraged gains are not consistent, which I will discuss more later in this article.

During the latest rally from mid-December 2014 to mid-January 2015, the leveraged gains that investors grew accustomed to during the early phases of the gold bull market returned. Gold advanced by 12% from the mid-December low to the mid-January peak. During the same time period, gold stocks advanced by a massive 37%, generating leverage of 3.1 times the advance in the gold price!

gold vs gold stocks

The really interesting aspect of the latest advance and pullback is that gold stocks have not registered a leveraged decline this time around. From the peak on 1/20/15 to 2/26/15, gold stocks declined by the exact same amount as gold, -8%. Investors were able to capture 3.1x leverage to the upside, without being penalized by that same leverage to the downside. This has resulted in a total gain of 26% for gold stocks since the 12/2o/14 low, despite the fact that gold is only up 3%. The leverage is an astounding 8.7 times over the last two months!

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The HUI/Gold ratio is is one of the many tools that we use to determine the investment strategies outlined in the Gold Stock Bull Contrarian Report (50% ...

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Kurt Benson 4 years ago Member's comment

"Some of the top mining stocks to look into: GG, ABX, YAM, NEM. A better business model and usually better returns can be had from streamers or royalty stocks such as SLW, FNV, RGLD. They make an upfront payment for a % of future production or revenue. Diversified exposure is possible via an ETF like GDX or GDXJ."

Thanks for this!

Paul McGee 4 years ago Member's comment

Really nice post, thanks.

The comment was deleted!

Kate Hayden 4 years ago Contributor's comment
That depends, what would you like ME to do for YOU for free? Read your article? Follow you? Share it?
Wendell Brown 4 years ago Member's comment

Hey guy, does it kill you to be polite? Maybe you don't like the way she said it, but while I don't mind having to go to your site to get the info, I don't like finding out I can't get it either. You might want to remember that some of us are just starting to look into gold and need some pointers before we can do our own research. Some examples of what you characterize as 'mining stocks' is all I'd ask for.

Wendell Brown 4 years ago Member's comment

Thanks for the recommendations Jason. Apologies for the "guy," I didn't mean anything by it. I've added you to my follow list.

Jason Hamlin 4 years ago Author's comment

Well, I find it rude that after I spent hours on research and analysis and provided the info for free, a reader complains about possibly having to read a few lines of promotional material on my site. It is par for the course to see an ad or promotional material on a site providing desired information for free. But to request that I send her stock picks because she "doesn't like having to go to your site (and probably subjecting myself to a sales pitch)" is a little rich. And no Kate, taking a second to follow or click on a share button is not a fair exchange of value for all of the time it takes to identify the best in breed mining stocks amongst a field of hundreds of companies.

But since you weren't rude Wendell, other than calling me 'guy', here are some of the top mining stocks to look into: GG, ABX, YAM, NEM. A better business model and usually better returns can be had from streamers or royalty stocks such as SLW, FNV, RGLD. They make an upfront payment for a % of future production or revenue. Diversified exposure is possible via an ETF like GDX or GDXJ.

Best of luck!

Kate Hayden 4 years ago Contributor's comment

What are some of the miners you suggest? I don't like having to go to your site (and probably subjecting myself to a sales pitch) to see the details.