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Gold Miners Looking for a Major Turnaround

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Here's why mean reversion for gold stocks will likely start in 2013.

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Gold stocks are about as contrarian a sector that exists in the market right now. Even though gold hasn't had a down year in 12 years, gold stocks have now recorded two straight down years, the first time that has happened during this gold bull market. Shown below is the performance of the HUI Gold Miners Index (INDEXNYSEGIS:HUI) since 2003:



Relative to gold, gold stocks have had about the same amount of underperformance that they had from 2006-2008. This ended up leading to two years of outperformance by gold stocks over gold in 2009 and 2010.



Relative to the S&P 500 (INDEXSP:.INX) gold stocks did horribly last year, recording their worst performance since 2003. And this is the first time since 2003 gold stocks have underperformed the S&P 500 two years in a row. Notice that before the last two years, gold stocks had outperformed the S&P 500 by double digits almost every year, except for a down year against the S&P 500 in 2004. Even with two down years in a row though, gold stocks are still outperforming the S&P 500 over the long term.





Compared against 52 exchange traded funds tracking various sectors, countries, and commodities, gold stocks were close to the bottom of the barrel both during 2011 and 2012. Below are the ETFs sorted according to their performance in 2012. In 2012 a lot of markets that performed poorly in 2011 had big turnarounds, most notably many European markets. Fading the negativity towards towards these markets in the middle of the year turned out to be the major trading opportunity of 2012.



Next is the list of ETFs sorted according to their performance in 2011. In 2011 the worst performing markets were basically foreign stocks and commodities. In 2012 foreign stocks had a big turnaround, but commodities didn't and lagged the rest of the market.



So the key thing to note as we enter 2013 is that commodities are one of the only sectors with two years of negative returns coming into the year. There's no doubt value investors and contrarians will be taking notice. There's research that shows that assets that have negative returns for two and three years in a row tend to outperform on the upside when they eventually mean revert.

Within the commodities sector gold miners are overdue for mean reversion, not only against gold, but against the stock market in general. Three years of negative returns in a row is pretty rare, so there's a good chance the mean reversion for gold stocks will start this year. Especially considering gold likely put in a major bottom last summer, and could be coming off of a successful retest of that bottom to start the year.

Editor's Note: This article was originally published on NextBigTrade.com.

Twitter: @nextbigtrade
No positions in stocks mentioned.
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