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Gold Miners To Outperform the Metals?


During a gold bull market, miners typically outperform gold.


The GDX opened higher this morning despite gold and the GLD kissing the red on the day. It's early, but this could be the day the GDX/GLD ratio (see chart below) finally smashes through the downtrend that's been in place since the October 2007 peak, when gold outperformed miners over the course of six months. During a gold bull market, due to their leverage to the metal, miners typically outperform gold and rise a multiple of gold's appreciation.

Click to enlarge

There are a number of reasons why we probably saw the metal outperform the gold shares over the six months following October 2007. But the point is, like the unusual environment during that half year, it's equally unusual for gold to outperform the shares. And we may now be seeing the action revert back to the historical norm. This is going to catch many people, especially those who view miners as underperformers (including many hedge funds that are "long GLD/short the GDX," a trade that has basically "worked" since October), off guard.

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After all, how many times have you been told by talking heads, "If ya wanna buy gold, buy the GLD, but don't buy the miners. They're underperformers." These talking heads don't understand the gold market - and they sure don't understand the economics of the gold miners.

If the downtrend in the GDX/GLD ratio is finally smashed today, we'll see a popular hedge fund "trade" (short GDX/long GLD) unwind as well. And the gold shares in the GDX will be the beneficiaries.

Let's see what happens.

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Positions in GLD, Gold Shares

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