News Analysis date published New: 
Wednesday, October 3, 2012 - 10:00
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Wednesday, October 3, 2012 - 10:03
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Wednesday, October 3, 2012 - 10:00

The Signal We've Been Looking for In Gold Stocks Is Here

Wednesday, October 03, 2012 10:00 AM

It finally happened. Gold stocks are breaking out...

Gold stocks -- or gold miners to be exact -- are the companies that physically remove gold bullion from the ground and bring it to market. How much money a gold-mining company makes is directly proportional to the price of gold. As a result, gold stocks are usually tightly correlated to the performance of gold prices.

But while gold has been one of the best-performing assets of the past decade, gold stocks haven't been so lucky.

In the past five years, the price of gold has risen 137% to about $1650/oz. Meanwhile, the AMEX Gold Bugs Index (AMEX: HUI) -- a proxy for gold mining stocks -- is only up a fraction of that at 23%.

Last year was even worse. While gold prices gained close to 10% in 2011, gold stocks actually fell, losing close to 12% throughout the entire year.

But the tables seem to be turning. In the past couple of months, gold stocks have started to outperform the yellow metal.

This chart shows the performance of gold stocks relative to gold itself. When the chart is falling, gold is outperforming gold stocks. When the chart is rising, gold stocks are beating gold.

As you can see, for most of 2011 and the first half of 2012, the chart fell steadily... indicating gold stocks have underperformed relative to gold.

But gold stocks have enjoyed a turnaround in the past few weeks. Since the end of July, HUI has gained close to 29%, while gold is only up 10.5%.

It's still too early to tell whether or not this is just a change in short-term momentum, or a true reversal of the beaten-down sector's fortune. But the past few months could be an indicator that the disconnect between gold and gold stocks is starting to converge.

Let me warn you though... If you're thinking about investing in gold stocks, then I advise using extreme caution, because gold stocks can be extremely volatile. When gold prices fall, gold stocks usually fall a lot harder.

But, that said... If you were looking for a sign that gold stocks are forming an uptrend, then it might have just arrived.

Risks To Consider: Gold stocks can be extremely volatile. During the market downturn between 2008 and 2009, some gold stocks sank by as much as -40%. Meanwhile, gold bullion still managed to stay above its 2006 levels.

Action To Take --> The Federal Reserve's recent announcement of a third round of quantitative easing could be a bullish indicator for gold prices. Historically, as the Fed pumps more money into the money supply, investors look to hard assets such as gold and silver as a hedge against inflation. As a result, gold stocks could continue to outperform in coming months. The easiest way to gain exposure to gold stocks is through an ETF, such as Market Vectors Gold Miners ETF (NYSE: GDX).

P.S. -- My colleague Nathan Slaughter recently revealed another commodity that's in a real bullish uptrend. Since then, its prices have quietly climbed higher, and they could even double again very soon. You still have a chance to get in on the action early, but it won't last long. Click here to get all the details and to find out how you can profit.

Austin Hatley does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.