HardAssetsInvestor

Written by Brad Zigler  |

April 21, 2011

Gold In Them Thar Stocks!

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With bullion over $1,500 an ounce now, gold's shining much more brightly. Perhaps not with as much gleam as silver, but better than stocks. For the year, spot metal's risen 6.7 percent, basis the London morning fix, versus a 3.4 percent gain for the S&P Composite.

As far as stocks go, gold miners have also beaten the S&P. Well, let me rephrase that. Some miners have beaten the blue chip benchmark. The index of gold producers underlying the Market Vectors Gold Miners ETF (NYSE Arca: GDX) has gained just 1 percent since the top of the year. Smaller-cap exploration and development companies proxied by the Market Vectors Junior Gold Miners ETF (NYSE Arca: GDXJ) have managed a year-to-date gain of 4.1 percent.

Measured against bullion, there's been a fall-off in mining stock performance since December. As you can from the relative strength chart below, larger-cap producers have fared worse than the juniors for quite some time.

Mining Stocks' Relative Strength To Gold

That's not to say that you couldn't have made money with the miners. After all, the juniors have maintained their cumulative advantage over bullion—their positive relative strength—even though that advantage has been recently diminished.

More important is the investor preference reflected here. Investors voted with their feet—and their wallets—when GDXJ was launched in late 2009. Back then, GDJX debuted with a share price that was roughly half that of its older sibling, GDX. By December 2010, the price ratio, adjusted for dividends, climbed to nearly 65 percent. The junior portfolio was the place investors seeking a leveraged gold return flocked.

Gold Miners (‘Risk') Ratio

Variances in the gold miners price ratio serve as a barometer of investors' risk appetite. When the "risk on" switch is flipped, the ratio rises. It tends to decline when investors pull in their horns. After last year's run-up, the ratio's upward trajectory stalled, though there's still a bias toward risk.

It's consolidation phases like this that precede explosive moves. For the past couple of months, traders' and investors' relish for risk (read: junior miners) has been muted. That's due to change.

In upcoming columns, we'll look at the stocks most likely to lead the breakout.