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Gold and Gold Stock Divergences: Commonly Observed Phenomena Since 2002


Chart show that gold stocks are taking their cue from the price of gold, even though their charts diverge every so often as market conditions change.

When investing in the gold sector, one of the most frustrating experiences you can have is watching gold outperform the gold stocks in your portfolio. Investors flock to gold stocks to leverage the returns in gold, not underperform gold. The idea is that a rising gold price produces bigger profits for gold producers, and the market rewards increased profits with higher share prices. So when gold investors take on the elevated risk of buying gold stocks, they want to see their gold stocks outperform the price of gold when gold is rising.

When gold stocks underperform gold it is often taken as a sign that gold is about to correct. Gold investors have blamed general stock market weakness in the past on the failure of gold stocks to leverage gold. They are stocks after all and sometimes the market throws the baby out with the bathwater, and sells gold stocks even when the price of gold is still holding up. In the charts below I'm plotting the Gold to HUI ratio to get a visual look at the times gold outperformed gold stocks. Those events are identified by sharp moves higher in the Gold to HUI ratio. Underneath the Gold to HUI ratio is a chart of gold, the HUI, and the S&P 500. This gives a look at what gold, gold stocks, and the stock market were all doing at the times that gold has outperformed gold stocks.


In 2002 gold stocks underperformed gold during two periods that also occurred during major stock market corrections. Each of those corrections caused gold to experience a pullback as well.


In early 2003 gold rallied while gold stocks pulled back along with the rest of the stock market. Gold finally succumbed to the weakness itself and had a correction. During the rest of the year gold stocks outperformed gold, which caused the Gold to HUI ratio to grind lower.


During 2004 gold stocks had one pullback where the stock market was still moving higher along with gold. Gold stocks had another pullback when stocks corrected and gold was flat. At the end of the major gold rally in 2004 gold stocks showed some weakness (which was unrelated to the stock market which was still rising). This weakness in gold stocks ended up providing a clue that the gold rally was about to suffer a correction.


In 2005 gold stocks were pulled down on two occasions where the stock market pulled back and gold held stable.


During 2006 gold stocks had a pullback early in the year when gold stayed relatively flat. The stock market at that time was relatively flat as well, so gold stocks pulled back more or less independent of the two.
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