Category Archives: Gold Stock Indicator

Are There “Values” in Gold Stocks?

Looking at any analysis of gold stocks, you would think that fundamentals matter.  The companies have quarterly reports that reflect operating expenses, pre-tax profits, estimates reserves, sometimes earnings and in rare instances dividends. 

However, when it comes to gold stocks, the only thing that matters is the direction in the price of gold.  If you believe you know the direction of gold then, by default, you know the direction that gold stocks are headed.  All semblance of fundamental analysis is ultimately not relevant to the price of a gold stock, in spite of proven & probable reserves, acquisitions, share buybacks, AISC or claims by the CEO that things are looking up (they rarely, if ever, say the opposite).

Take a look at a comparison between gold and the price of Barrick Gold Corp. (ABX) in the period from October 2003 to April 2017.


The only distinction to be made between the price of the stock and the price of gold is the magnitude of the direction up or down.  If fundamental investing mattered, then at some point there should be some level of divergence in the general direction of gold and gold stocks.  This would allow savvy investors to seize on the mispricing of a stock and ride the wave up or down.

For the sake of comparison, look at the difference between corn and Archer Daniels Midland (ADM) over the same period as the ABX and gold review.


In the case of ADM, we can see the areas (blue boxes) where there are distinct divergences between the price of the stock and the price of corn.  These are key areas where fundamental values, and basic economics, demonstrate key levels of under/overvaluation.  Of course, ADM is not simply a pure play on corn as they’re involved in other agricultural products.  However, knowing the industry, pricing, competition and other attributes of the business could give you a distinct advantage as a buyer and seller of ADM stock.  This is not the case for gold stocks.

Lest we be called out for being selective in choosing a period that was only in a rising trend, we have included the period from 1983 to 2001 and compared the Philadelphia Gold and Silver Stock Index (XAU) to the price of gold, a time when gold was in a declining trend.  In this more expansive period of time, there was only one point in time, January 1986 to July 1986, when there was a material divergence between the price of gold and gold stocks.


It is precisely when there is a material divergence between gold and gold stocks that a fundamental review will reveal the true “value” and therefore warrant contrarian investments (short/long) in the gold stock complex.  If a period of divergence isn’t as readily identifiable, as in the ADM example, then you know that what should be examined isn’t the stock but the underlying commodity.

Ultimately, when a well known stock analyst ( or unknown) applies fundamental analysis to a gold stock, you know that you are reading material that is of little or no value in relation to reality.

Gold SRL

On June 5, 2016, we said the following of gold:

“Upside resistance is at the ascending $1,055.42 level.  the current downside move looks to retest the previous move to the ascending $843.32 level.”

Breaking this down, we note where gold was at on June 5, 2016 on the accompanying chart.  At the time, gold had come off of a +17% spike in price from the December 17, 2015 low.  A run up to the ascending $1,055.42 level would have brought gold as high as $1,400.  The best that gold could do on the upside was $1,366.25 before falling back down to the ascending $843.32 level.


Where to Now?

Gold Stock Indicator: March 2017

Performance Review

In the March 2016 posting on the Gold Stock Indicator (GSI), we said the following:

“As long as gold can stay above $1,184.25 and the XAU Index can stay above 57.96, the chances are that a new bull market in gold is in force.  Naturally, a decline below the most recent 1-year lows would erase any notion of a bull market in gold.  In spite of a decline below 38.84, the XAU Index is at the most extreme in terms of value.  With the assumption that the future will see an oversupply of commodities (a further collapse in prices), investors and speculators who are not averse to a high risk portion of their portfolio should consider investment in gold stocks.  First time investors in this sector should start with a position in Market Vectors Gold Miners ETF (GDX), and then wait.”

Since that early March 2016 posting, the price of gold stocks (as represented by the XAU Gold and Silver Stock Index) have increased as much as +78.16% while settling at the current level of +26%. 


Meanwhile, the Market Vectors Gold Miners ETF (GDX) has ranged as high as +61% while falling as low as –2.21% and currently sits at a gain of +16% since our March 2016 posting.


One year later and the tale of the market for gold and gold stocks is told in the chart below. 


We see that there has been a lot of volatility in the last year but little in the way of change for the price of gold while gold stocks have made some marginal gains.  This is where analysis and interpretation are key.

Gold Stock Indicator: February 2017

Since our January 2017 posting on gold and precious metals stocks, the price of gold has increased +3.48% while at the same time precious stocks have declined –5.87%.  There are some contradictions in the movement of each indicator which we will interpret below.


Gold Stock Indicator: January 2017

Since our last posting on gold and gold stocks (as represented by the Philadelphia Gold and Silver Stock Index [XAU]), the change in price has been +3.28% and +10.64%, respectively.


As of the most recent reading, gold stocks are saying something that has yet to be confirmed by the price of gold.  With the price of the XAU increasing above 89.83 level set on November 9, 2016, gold stocks are saying that the trend should be higher.  Unfortunately, the price of gold needs to confirm the direction as well.  As we know, the price of gold typically lags gold and silver stock but in this case the lag is somewhat large.