Gold stocks turned lower alongside the yellow metal on Monday as the Market Vectors Gold Miners fell 0.4% to $63.84 per share. Gold stocks initially rallied, with the GDX hitting $64.76 this morning, but soon after headed south as gold futures tumbled from $1,810 to as low as $1,778.20 per ounce amid broad-based liquidation on Wall Street. The S&P/TSX Global Gold Index, a basket of gold stocks in Canada, dropped 0.3% alongside the GDX.
Although gold stocks and the GDX relinquished their gains this morning, they were substantially outperforming both the yellow metal and broader equity markets. The Dow Jones Industrial Average (DJIA) plunged 241.05 points, or 2.1%, to 11,268.04 as European sovereign debt worries and the potential of a Greek default put significant pressure on Wall Street.
While gold stocks as a group have drastically lagged the price of gold in recent years, over the past few months this trend has begun to change. Since reaching a 52-week low of $51.10 on June 16, the GDX has climbed 24.9%, compared to a 16.9% rise for the yellow metal. Furthermore, thus far in September the GDX is higher by 1.7%, versus a 2.0% decline for the gold price.
One prominent investor who has remained steadfastly bullish on the gold stocks sector and many components of the GDX is Eric Sprott, founder and head of Sprott Asset Management. In a monthly commentary that he graciously publishes for free on his firm's website, the billionaire investor and hedge fund magnate reiterated his very positive outlook on gold stocks and the expectation that they will significantly outperform the yellow metal in the years ahead. Although Sprott did not discuss specific gold stocks at this time, recent SEC filings show that his firm holds significant positions in a wide variety of small-, mid-, and large cap gold companies.
In many of the funds we manage at Sprott, we've transitioned out of gold bullion and into gold equities, Sprott wrote. As long-time investors in this space, we can assure you that the production growth rates will be significantly higher in the junior stocks. They continue to trade at discounted valuations, and we believe they offer the best opportunity to build exposure. Margin expansion is the key metric for this industry, and the market is now acknowledging the miners' improvement in margin capture which has occurred despite the increase in capital and operating costs.
Sprott went on to say that In our view, gold stocks represent a bona fide growth sector in an otherwise dreadful equity market. All other equity sectors are weakening due to sovereign uncertainty and the reemergence of soundly weak economic data. The recent disconnect between gold equities and bullion isn't new either. We've seen it before over the past decade, and the returns generated after previous divergences have averaged around 26%...Given the recent performance correlations, the HUI's breakout above 600 and spot gold now firmly above $1600, we expect this rebound in gold equities to be prolonged and much more significant in percentage terms.
In morning trading, notable gold stocks moving lower alongside the GDX included Agnico-Eagle Mines, AngloGold Ashanti, and Kinross Gold by 1.0%, 1.3%, and 2.4%, respectively. On the positive side, GDX components bucking the trend of weakness in the broader gold stocks sector included Barrick Gold, Newmont Mining, and Randgold Resources which advanced 0.7%, 0.9%, and 1.0%, respectively.