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Friday, June 8, 2012

GDX revisited

I just ran across this chart and I found it rather interesting.  Check this out.

By measuring gold mining stocks in terms of the gold price, they have never been cheaper in the last 30 years.  It is easy to see by looking at the price charts that there was a disconnect between gold price and the mining stocks, but this chart really quantifies it.  We have all seen markets go to extremes beyond all expectations before, but this seems really out of whack.  I can't recall ever seeing a market go to extremes that did not have fundamental reasons for the direction of the move.  The best explanation I have heard for gold miners lagging the last few years was because they were spending a lot on mining equipment.  That could be true and makes sense if it is.  However, at some point shouldn't that extra equipment start paying off.  Why did they crash again? 

It seems to me there are two distinct possibilities here.  This is either the buy of a lifetime in gold mining stocks or the price of gold is going to come down drastically.  I am not smart enough to figure out which it is at the moment.  The GLD chart has been consolidating for months and could break down just as easily as start up again.  For short term traders none of this matters.  However, anybody looking at these for long term investments need to do their due diligence for sure.  Some day this situation will make sense, it always does in the end.   In the mean time, we need to monitor gold closely.  It will surely be the key to which scenario plays out.



Anonymous said...

Bob, I saw a video presentation put together by someone at Casey Research. They indicated that small mining companies had increased spending on administration... basically, overpaying office staff and workers, which has caused profits to decline. I wanted to pass this information along. However, readers should be careful to connect dots... if the aforementioned is true, it does not necessarily mean GDX is ready to rally. Miners could also be experiencing front line lack of demand for physical gold (hard landing, China?).

Traderbob58 said...

That was interesting thanks for the info. There definitely could be issues the market is dealing with that we do not fully understand. I think it will take some time for the markets sort things out.



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