Can Miners Outperform Gold Despite Twist?

“If you limit your choices only to what seems possible or reasonable, you disconnect yourself from what you truly want, and all that is left is compromise.” - Robert Fritz
 
I’ve addressed the performance of Gold Miners a few times here on Investing.com, noting that 1) Gold (GLD) has significantly outperformed mining stocks which in theory should simply be a leveraged play on future gold prices, and that 2) the extent of underperformance relative to Gold could cause miners to rally faster on a mean reversion trade. In the May 28th article titled “The Curious Reconnect Between Gold and Gold Miners”, I stated that “the decline had exhausted itself in a capitulation-like move…the formation could be an early stage “V” of strength.”

Much has happened since then, including the Greek election, continued fear over Spain, and the extension of Operation Twist by the Federal Reserve. One would think all of this would benefit the stock side of the Gold equation, yet curiously it has not. Take a look below at the updated chart of the price ratio of the Market Vectors Gold Miners ETF (GDX) relative to the SPDR Gold Trust (GLD). As a reminder, a rising price ratio means the numerator/GDX is outperforming (up more/down less) the denominator/GLD.


Notice the strong rally off of the March lows, and how the trend may be tapering off on the far right. Last week resulted in “stimulus disappointment” from the Fed not giving the market what it wanted in terms of QE3 through the extension of Operation Twist as I noted on CNBC. This may have caused a short-term period of weakness in Gold Miners. However, I maintain that there is more potential to run in Miners relative to Gold itself given how severely it underperformed since early 2011. This coming week should provide clarity, and I suspect that a comeback could re-assert the trend in outperformance for a longer time period.

Disclosure and Disclaimer: This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.