Gold Stocks Not Out of the Woods Yet

March 16, 2009 | By: Hard Assets Investor

By Brad Zigler

Real-time Inflation Indicator (per annum): 7.1%

This week's been a pretty good one for stocks, including mining stocks. The Market Vectors Gold Miners ETF (NYSE Arca: GDX),whichtracks an index of 31 issues, rose 1% over the past five trading sessions. Then, again, so did gold bullion. The gain in the SPDR Gold Shares Trust (NYSE Arca: GLD),a proxy fortheLondon AM gold fixing, pretty much matched that of the mining ETF.

Largely, it was a wash for gold investors this week. You could have made 1% no matter what form - equities or metal - backed your exchange-traded product. Such is not always the case, as readers of this column know.

We track and regularly comment on the GLD/GDX ratio as a bellwether of gold investor sentiment. Some of that sentiment, at least reflected by queries we've received, can be best described as "So what?"

Well, take a look at bullion's recent price movement compared to the Philadelphia Gold/Silver Index (XAU), a mining index that predates the launch of the Market Vectors portfolio.

Gold Bullion Vs. Mining Shares

The first thing you'll probably note is the wide gulf that's developed between bullion's and stock's recent performance. Plainly, stocks have taken a shellacking over the past few months compared to the shiny stuff itself.

There have been times when stocks have outdone metal, though. Between May 2005 and January 2006, for example, the mining index soared 74% higher, an appreciation rate about three times that of bullion. The last time miners outdid metal, however, was a brief three-month interlude in late 2007.

Among the forces accounting for miners' past outperformance was a robust equities market. Mining stocks are, after all, stocks. As such, there's equity market risk attached to them. That risk, of course, has become more than apparent over the past few months.

Now that the equity market is showing some legs, it's only natural to wonder about the miners' prospects. And here's where we dial into our GLD/GDX ratio.

GLD/GDX Ratio

Notice the green line? That's the ratio's 200-day moving average. Gold's under-performance in February ratcheted the ratio down to test the average. Successfully. Gold prices bounced, leaving the ratio's intermediate uptrend intact. Bullion's recent buoyancy has turned the nearer-term momentum in the metal's favor as well.

The bottom line? Gold stocks haven't yet cleared the woods. That's not to say that miners can't rise. Until the equity market shows more solid promise, however, the metal investment most likely to emerge from the woods first is bullion.

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