Look at the chart of GLD vs. GDX (gold miners ETF) over the last 3 years:
The black line shows GDX over the last 3 years (down 10% in the period), and the orange line shows GLD (up 48% in the last 3 years). What’s most notable is that the strong relationship between the 2 broke down in late 2011, and has persisted in 2012.
First of all, the correlation has actually still been positive the whole time (usually between 70 and 80%). In other words, when GLD goes up, GDX tends to go up, and same action on the downside. But the large divergence is a result of the fact that GDX has tended to go down much more for small moves in GLD. For example, in the last month and a half, GDX is down 16%, while GLD is only down 4%. The most severe divergence occurred this spring, when GLD sold off 15%, while GDX sold off more than 30%.
The natural question is, what’s the reason for the huge divergence? I think there are several reasons.
- Gold the commodity is owned by a much larger, more diverse investor base. People throughout the world buy or sell gold for numerous reasons, in many cases unrelated to the stock market. In the current global environment of easy monetary policy, there is a large sticky investor base that views gold as insurance
- Gold miners, as stocks, have had a very poor earnings performance in the past year. Their cash costs on their mining projects have risen while gold and silver are essentially flat, squeezing their margins.
- Commodity stocks often trade at lower multiples as the underlying commodity moves higher, as investors become more nervous about future losses from the commodity reversing those gains.
Given that those 3 conditions are unlikely to change, any bullish bets on the precious metals sector should probably be taken with GLD and SLV, the actual commodity ETFs, and any bearish bets are better placed in GDX.