The Curious Disconnect Between Gold and Gold Miners

“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

As I have argued in many of my prior writings, I continue to stress the idea that 2012 is likely a year of reflation similar to 2003 and 2009, with potentially a significant move higher coming for risk assets. Scared money is getting scared of missing stocks to the upside as inflation expectations continue to increase following last year's deflation pulse driven by Europe. While Gold likely can generate returns in such an environment as money positions into it as an inflation hedge, I believe stocks are likely to fare much better than the precious metal. The reasoning mainly has to do with the idea that stocks are no where near as loved as Gold, which has outperformed equities for over a decade.

Interestingly, Gold Miners are diverging significantly from Gold. Take a look below at the price ratio of the Market Vectors Gold Miners ETF (GDX) relative to the SPDR Gold Trust ETF (GLD). As a reminder, a rising price ratio means the numerator/GDX is outperforming (up more/down less) the denominator/GLD.

I've annotated the chart to show the severe relative weakness Gold Miners have exhibited against Gold since early last year, and as 2012 has unfolded. This is curious because Gold Miners are equities first, and Gold plays second. Given the rally up in broad stocks so far, it is as if investors in Miners are betting on Gold prices to decline or at least stop making new highs. After all, the higher Gold prices go the more valuable Gold is which eventually gets mined. If expectations for future Gold prices are muted, than Gold Miners likely have a hard time. Could Miners be warning of further weakness in Gold prices to come?

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.