Guest Post by Steve Saville
That gold mining has generally been a crappy long-term investment for almost five decades is evidenced by the following chart. The chart, much of the data for which were provided by Nick Laird of www.sharelynx.com, shows the ratio of the Barrons Gold Mining Index (BGMI) and the US$ gold price from 1920 through to the present*. More specifically, it shows that, relative to gold bullion, the group of gold-mining stocks represented by the BGMI has been in a secular decline since 1968 and is now close to its lowest level since 1948. The question is: Why have gold mining stocks performed so poorly for so long relative to the metal?
As crude oil continues down today we are presented with a perfect opportunity to review why gold mining fundamentals can IMPROVE in a rising US dollar atmosphere. So many people run the equation through their heads: USD Strong = Run Away!
Remember that heavy volume in the gold juniors ETF GDXJ? It was a sign of commitment and it was/is bullish.
But what’s good for the goose is now good for the bearish gander in the short term, evidently.
The (3x) bear fund JDST seems to be receiving some of that volume even as GDXJ’s volume dries up (as it should do on a corrective phase within a bullish trend).
It appears a lot of people are hedging. It could be nothing, but that’s a lot commitment building for the gander for a mere corrective consolidation. Would the conspiracy brigade foresee an impending hit from Team Evil? Or maybe it is the sign of a disbelieved rally and is thus bullish. Or maybe it’s nothing.
Just found it interesting is all.
The following is the opening segment of this week’s Notes From the Rabbit Hole, NFTRH 276:
Somewhere along the road from the 2000 bottom in gold stocks to the 2008 flame out of inflationary hysteria, the gold stock sector went from counter cyclical first mover to ‘inflation trade’ also ran. Gold stocks put in a secular bear market bottom in 2000 just as the US and many global economies were topping out.
Then came the era that NFTRH has labeled ‘Inflation onDemand’ (IoD). The economy was successfully* inflated by Alan Greenspan early in the decade as easy monetary policy fomented an epic credit bubble, which took over and did the heavy lifting for a cyclical bull market and buoyant economy that terminated hard in 2007/2008.
During this time of IoD ‘inflation bulls’ and commodity bulls who had all the answers for a newly inflation-phobic public emerged and took center stage. Misperceptions were formed, cemented and driven home. Nowhere were the misperceptions more intensely and dangerously embedded than the gold stock sector, which at its core is different than most commodity sectors and indeed, most stock sectors. Introducing another one of our ‘busy’ charts to illustrate…
Okay, article over… the chart says it all. No more words necessary!
The chart is a confusing jumble you say? Okay then, let’s take it point by point.
Forget the inflationists, forget the ‘buy all resources!’ brigade and remember that at its healthiest, the gold mining sector is counter cyclical. And for the last couple days at least, it has been acting that way. Gold stocks benefit from economic contraction as gold out performs positively correlated assets. Tune out much of the rest of the crap because it is not useful.
The gold oil ratio (GOR) is propelling higher. This is but one indicator of the counter cycle that I believe is coming in 2014. But also, it is an important indicator for the gold mining sector’s downtrodden fundamentals. The indication? Maybe just maybe the news of gold mining’s imminent death was greatly exaggerated.
First it bottomed vs. the stock market (lower panel). Then the ‘real price of gold’ bottomed vs. crude oil and has just this week boinked above the 50 day moving averages.
So while gold cheerleaders ready the pom poms, what we should do is keep an eye on its ratios to positively correlated things so that we can have a good read on the macro for one, and on the gold mining fundamental backdrop for another.
So, how important do you think this chart is to the gold mining sector’s fundamental case?
The gold oil ratio (GOR) did something nasty recently in making this lower low and this will need to be reversed for an already stricken sector to catch a break.