Monday, June 6, 2011

Gold - Gold Miners divergence

Gold up, Gold miners down

Gold is depicted with the dotted line and the Gold miners (GDX in this case) is the solid black line. The Gold miners led Gold from late August 2010 to the end of the year.  Since late April 2011, the Gold miners have taken a back seat to the Gold rally.  These two take turns leading and with the S&P500 in a downtrend, it seems like the Gold miners are following the Index rather than the Gold price.

Silver miners are starting to lag the spot price of Silver which is depicted in the dotted line and the Silver miners ETF (SIL) in the solid black line.

If anyone is long Gold stocks, they may be in for some volatile price swings going into the summer months. With QE2 ending in June, many people are speculating that the markets will drop just like in May of 2010 when the TARP program ended.

The Gold and Silver equities will lead again, but it may be towards the end of the year after the financial markets stabilize after QE2 ends and maybe when QE3 starts...? (Or whatever the Fed is going to call it)

If Gold is selling for $1550 an ounce and a miner is getting the Gold out of the ground for ~650, there is going to be some very good quarterly earnings. Where else can you buy Gold for $650 an ounce?  Of course, the risk level is also much higher with the miners, especially when they trade just like any other stock.  If a sell off occurs like 2008/2009, everyone with a margin call will be forced to sell their shares sending them down even if Gold is up.  Long term investors in quality Gold miners should be fine with a 2-3 year holding period.  2013-2015 should see some major gains in the Gold/Silver/miners market.

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