Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
If You Don’t Understand Bonds, You Don’t Understand Investing - 25th Aug 19
Gold's Next Move - 25th Aug 19
Fresh Water Crisis Unfolding - 25th Aug 19
Newbie Guide to Currency Pairs in Forex Trading – Review - 25th Aug 19
When A 16-Year-Old Earns $3 Million, You Know It's Not A 'Silly Fad' - 24th Aug 19
The Central Bank Time Machine - 23rd Aug 19
Stock Market August Breakdown Prediction and Analysis - 23rd Aug 19
U.S. To “Drown The World” In Oil - 23rd Aug 19
Modern Monetary Theory Could Destroy America - 23rd Aug 19
Seven Key Words That Explain "Stupidly High" Bond Market Prices - 23rd Aug 19
Is the Fed Too Late Prevent A US Housing Bear Market? - 23rd Aug 19
Manchester Airport FREE Drop Off Area Service at JetParks 1 - Video - 23rd Aug 19
Gold Price Trend Validation - 22nd Aug 19
Economist Lays Out the Next Step to Wonderland for the Fed - 22nd Aug 19
GCSE Exam Results Day Shock! How to Get 9 A*'s Grade 9's in England and Maths - 22nd Aug 19
KEY WEEK FOR US MARKETS, GOLD, AND OIL - Audio Analysis - 22nd Aug 19
USD/JPY, USD/CHF, GBP/USD Currency Pairs to Watch Prior to FOMC Minutes and Jackson Hole - 22nd Aug 19
Fed Too Late To Prevent US Real Estate Market Crash? - 22nd Aug 19
Retail Sector Isn’t Dead. It’s Growing and Pays 6%+ Dividends - 22nd Aug 19
FREE Access EWI's Financial Market Forecasting Service - 22nd Aug 19
Benefits of Acrobits Softphone - 22nd Aug 19
How to Protect Your Site from Bots & Spam? - 21st Aug 19
Fed Too Late To Prevent A US Housing Market Crash? - 21st Aug 19
Gold and the Cracks in the U.S., Japan and Germany’s Economic Data - 21st Aug 19
The Gold Rush of 2019 - 21st Aug 19
How to Play Interest Rates in US Real Estate - 21st Aug 19
Stocks Likely to Breakout Instead of Gold - 21st Aug 19
Top 6 Tips to Attract Followers On SoundCloud - 21st Aug 19
Holiday Nightmares - Your Caravan is Missing! - 21st Aug 19
UK House Building and House Prices Trend Forecast - 20th Aug 19
The Next Stock Market Breakdown And The Setup - 20th Aug 19
5 Ways to Save by Using a Mortgage Broker - 20th Aug 19
Is This Time Different? Predictive Power of the Yield Curve and Gold - 19th Aug 19
New Dawn for the iGaming Industry in the United States - 19th Aug 19
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Gold Stocks vs. Gold

Commodities / Gold and Silver Stocks 2013 Feb 08, 2013 - 02:20 PM GMT

By: Jordan_Roy_Byrne


The gold and silver stocks as a group have certainly been a disaster over the past two years. Both GDX and GDXJ are down with GDXJ leading the spiral. Yet, the metals are actually higher. Gold is up quite a bit while Silver is up marginally. Because of the volatility in this sector we can certainly choose any period to emphasize a point. However, it is becoming clear that the mining equities are struggling to outperform the metals. In studying the history of this sector (both the stocks and the metals) I’ve learned two things that I will share with you today. First, the large-cap miners have no track record of consistently outperforming Gold and second, it is possible to routinely find companies which can outperform the metals.

I credit the first point to Steve Saville, who was one of the first to note that the miners do not consistently outperform the metals. In fact, in secular bull markets the stocks consistently underperform Gold. Steve’s chart below shows how the miners underperformed badly from 1974 to 1980. Recall that the Gold price was fixed until 1971. Thus, both the uptrend from 1964-1968 and the downtrend from 1968-1971 are exaggerated.

It is simply a function of geology and numbers. Large companies have an extremely difficult time finding enough deposits and big enough deposits to not only replace reserves but to grow production. It’s much easier for a company to grow from 50K oz Au production to 100K oz Au production than it is for a company to go from 2M oz Au production to 4M oz Au production. Throw in political risk, permitting delays, financing issues and execution issues and its understandable why the large companies underperform the metal. This being said, it’s important to take all those XAU vs. Gold charts with a grain of salt. Over the long-term, Gold will continue to outperform and that chart will continue to make new lows.

Moving along, it is important to examine the relative strength of various gold stocks in particular market cycles. Below we graph the HUI versus Gold. We highlighted the performance during cyclical bull markets. In all three examples we notice that the biggest gains came at the start of the cyclical bull market. In the last two, the bull market ended as the HUI/Gold ratio peaked slightly below its high for the cycle. This tells us that the stocks will strongly outperform at the start of the next cyclical bull but that outperformance will ultimately peak or fade.

Next we move down the food chain. For subscribers I created a 20-stock index which contains roughly the 20 biggest producers outside of the HUI. As you can see the price action during this cyclical bear looks somewhat similar to the HUI. However, focus your attention on the next chart.

This chart is the ratio between the above 20-stock index and Gold. The ratio bottomed in late October 2008 and peaked in early December 2010. The increase in this ratio coincided with the exact period of the cyclical bull market (if you count December 2010 as the end which I do). One could claim that the next problem is the above index underperformed even as Gold was rising. That is true. Nothing is perfect.

However, we took things a step further. I thought of 10 of my favorite growth-oriented producers (royalty companies included). Seven of the ten have been part of our model portfolio at one time or another. Below is the chart of an equal weighted index of the 10 stocks. It was up 4% in 2011 and 42% in 2012!

Here are my conclusions on this small study. The large cap miners will continue to underperform Gold through the end of the bull market. However, they will outperform when the next cyclical bull begins and probably soon. However, they ultimately will underperform over the next five years. During a cyclical bull market a large group of junior producers can outperform Gold strongly. You only need to be able to pick the right large group. The better a stock picker one is, the more one can outperform. Clearly, if you are stock picking this sector you should never dabble in the large cap miners. If you want safety than go with bullion and try to find a mutual fund that has a track record of picking the right stocks. If you want to speculate than you need to train yourself to be an excellent stock picker or find someone who can help you learn.

Interestingly, I believe the near-term outlook is pretty good and most stocks have a chance to outperform the metals into the spring. The caveat is we need to see a final breakdown first. GDX, the HUI and my junior index above are all consolidating which could precede a breakdown and the final low. Over the past 10 sessions, GDX has been locked into a range of $41.50 to $43.00. A downside break, in your humble author’s opinion could lead to the final bottom which we wrote about last week. Continue to be patient and continue to have your favorite stocks in mind.

If you'd be interested in professional guidance in this endeavor, then we invite you to learn more about our service.

Good Luck!

Service Link:

Bio: Jordan Roy-Byrne, CMT  is a Chartered Market Technician, a member of the Market Technicians Association and from 2010-2013 an official contributor to the CME Group, the largest futures exchange in the world. He is the publisher and editor of TheDailyGold Premium, a publication which emphaszies market timing and stock selection for the sophisticated investor.  Jordan's work has been featured in CNBC, Barrons, Financial Times Alphaville, and his editorials are regularly published in 321gold, Gold-Eagle, FinancialSense, GoldSeek, Kitco and Yahoo Finance. He is quoted regularly in Barrons. Jordan was a speaker at PDAC 2012, the largest mining conference in the world.

Jordan Roy-Byrne Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules