From reader EBW today:
Gold stocks were also higher, as folks are possibly realizing that zero-percent interest rates for two years in America,plus more QE in Europe, Japan, and Switzerland, is very likely to push gold higher, not lower. This may mean it is finally time for them to get some respect.
After lagging the metal for months (actually years), gold mining stocks are beginning to show relative strength versus the the stock market indices. Today was an especially impressive breakout for the juniors, as reflected in GDXJ, versus the down market. It appears these stocks are finally beginning to be valued on the value of their reserves.
Gold stocks and the metal generally move together although not in a one-to-one relationship. The leverage afforded gold stocks often causes them to move multiples of the percentage moves in the underlying metal. That was apparent in the early days of the gold rally, say 2000 to 2007 when mining stocks greatly outpaced the value of the gains in the metal.
Some argue that mining stocks should outpace the percentage gains or losses of the underlying metal by a 3-4 factor. Obviously this rule of thumb is no better than other so-called simplistic guides. Recently, when energy costs have risen dramatically (and they are the largest cost for extraction companies), mining stocks have not kept pace with the increase in the underlying metal price.
Are we about to see the catch-up? The decline in energy costs, likely associated with recessionary conditions, would suggest so. So too would the run up in gold prices that do not appear to have been yet reflected in mining stock prices.
Gold stocks, as stocks, are generally more susceptible to market sell-offs than gold itself. Recent action of the miners, however, has been good despite poor overall stock market performance. Today, for example, the Dow declined over 500 points while GDXJ increased by 4.30%. Its sister ETF GDX, a collection of larger gold mining companies, increased 2.78%. GDX is generally less volatile than GDXJ. Both are generally more volatile than the price of gold.
I went in big Tuesday on GDXJ, speculating that the stock market might turnaround. I sold about 25% of this position today (Wednesday) during the strong mining stock rally. Probably dumb luck.
Mining stocks are not for conservative investors (those who don’t sleep well with big swings in their portfolios). I consider them ideal speculations in today’s market. Gold has strength, and the mining stocks probably need a catch-up move to reflect the price of gold. They may move counter to market declines (as they did Wednesday). Hopefully they will excel if the general market recovers. While I don’t expect that to happen, the mining stocks are an attractive way, in my opinion, to speculate in today’s markets.
This is not a recommendation of any sort. It is merely the way I look at markets. Consult your financial advisor(s) for advice that meets your needs, portfolio and risk tolerance.
