When Will Gold Stocks Catch Up To Gold Prices?

Palisade Research April 24, 2017
Category: Research

Last week, we released a well-received article outlining gold’s recent outperformance of the gold stocks. The article even made its way to the home page of ZeroHedge.com, http://palisade-research.com/gold-up-110-gdxj-remains-flat-get-ready-for-gold-stock-rubber-band/.

We wanted to go examine gold’s performance relative to gold stocks in previous cycles. As we expect this to be an epic cycle for gold, we looked back at the 1976-1980 bull market that saw gold reach a high of $740.

Gold actually outperformed the BGMI, an index comprised of the largest gold mining stocks, from 1976-1980!

However, gold stocks significantly outperformed gold during the last six months of that bull market run.

Now, before going further it is worth stating that the BGMI is comprised of major miners, companies that historically underperform exploration and development companies. Hence, the performance of gold stocks is muted in these charts.

So what explains this price action? Part of this theory can be attributed to our friend, Michael Pole, an entrepreneur, futurist, world traveller, and avid gold bug.

Historically, gold has been used as an inflation hedge. However, it appears that current buying is more of a protection against uncertainty, especially with headwinds of rising interest rates.

Thus, for the time being, miners may feel a squeeze in margins, especially for smaller companies without large cash reserves. Rising interest rates means the cost to borrow money becomes more expensive, in turn making it costlier to expand operations.

Nevertheless, gold miners will inevitably catch up. When inflation rears its ugly head, gold and silver will be bought as a hedge. And when investors can no longer obtain the physical metal, mining stocks will begin to outperform.

It will be towards the end of the bull market that the herds will really come running in. This last phase of demand will be from the middle class, who will utilize their brokerage and (what is left of) savings accounts to buy it all up. And this additional buying is when the bull market kicks into overdrive.

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