Stand Strong with Gold and Gold Shares

Many investors fear that the gold stocks will never reflect, in terms of capital appreciation and dividends, a rising gold environment. This is total nonsense. Well-timed headlines and talking heads; nevertheless, often quickly turn from avid “gold bugs” holders to nervous sellers.

The question is will gold stock ever outperform and provide the leverage so many seek? Let me be clear – yes. While recent history (1968-) suggests that gold leads the gold stocks (see the gold vs. gold stocks chart below), investors tend to believe the opposite. This is why their ranks are so easily broken into fear.

Gold vs. Gold Stocks (GPM)



While the lag between the breakout in gold and gold shares is much greater than previous ones, it likely reflects the growing global economic stresses. The safety of physical gold, money without liability, carries no business or management risk. This gives it the safe haven trade or leading characteristic into a crisis.

This, however, does not suggest that gold shares do not follow or provide leverage to gold. The table below illustrates the tight correlation between gold and gold shares during gold bull markets. While the correlation has “loosen” a bit since 2006, it will likely tighten as the gold shares continue to edge towards a historical breakout.

Historical Correlation Gold Stocks and Gold:


Defintion of Correlation: en.wikipedia.org

In my May 13th commentary gold shares are one step closer, I suggested that a massive breakout of a long consolidation pattern is drawing near. To this I will add that such a breakout will not only take gold stocks higher but also once again reaffirm their role as leveraged gold plays. Unfortunately, fear, doubt, and lack of discipline will shakeout many investors before history is made.