Up, up, and away...
That's how gold stocks are moving. The Market Vectors Gold Miners ETF (NYSE:GDX) is climbing. And the recent move was exceptionally strong. The ETF, which tracks the major gold stocks has steadily climbed this week.
The exceptionally strong move in gold stocks was propelled by a $20+ surge in the price of gold.
But we have to wonder whether this surge in gold stocks will end up going the way of every other gold rally in the past year and a half, if not how sustainable the rally is, or how much in gains to expect in the short-term if this is the last great buying opportunity in gold.
Strength and Sustainability
Back in January, gold stocks were terribly undervalued relative to gold.
In our Trade of the Year we looked at how to play the undervaluation of gold stocks relative to the price of gold. We looked at the price of gold - as tracked by the SPDR Gold ETF (NYSE:GLD) - relative to the value of gold stocks - tracked by GDX, Gold Miners ETF mentioned above (Gold/XAU is more popular, but it has much more exposure to volatile silver stocks).
At the time the gold to gold stocks ratio was near a multi-year peak. You could purchase 2.6 shares of GDX for every GLD share. This was well above the long-run historical GLD/GDX ratio which ranges between 1 and 1.5.
Today, the ratio continues to decline (the ratio declines when gold stocks outpace gold). The ratio closed at 2.26 (GLD - 96.19/GDX - 42.48). As the chart below shows, the ratio is working its way back to its lows for the year - which is very good for gold stocks.
So, when wondering if this rally in gold is sustainable, the answer is a resounding yes. In fact, there is a lot more room to run for gold stocks before they reach their 2008 relative norms.
How Much Can We Make Of This Run?
Now, if we look back to early 2008 when inflation was the fear du jour, gold passed $1,000 an ounce, and gold stocks were hot, we can see gold stocks - as a whole - have a lot more room to run.
The GLD/GDX ratio hit a low of 1.75 in April 2008. That means, from this point, gold stocks could realistically climb another 22% from here even if gold doesn't move another inch. But if we start adding in a rally in gold as well, the short-term potential gets a bit more enticing. A run in gold to $1050 would push the upside in gold stocks up to 42%.
Of course, not all gold stocks are created equal. For instance, these five gold stocks actually climbed a total of 516% in three months and two of them have doubled again in the past few months(get full report free here).
So gold is looking good and gold stocks are looking great at this time.
What Does History Say?
Finally, we can't forget what else history is telling us.
As many of you know by now, historically, September is the worst-performing month for stocks as a whole. September, however, is one of the best-performing months for gold stocks.
The chart below, as published by Frank Holmes, CEO and CIO of U.S. Global Investors (NASDAQ:GROW), points out how well gold stocks have done in September:
Clearly, September is historically a stellar months for gold stocks.
The Stars Are Aligning
We all know the long-term outlook for gold - unfounded government spending, unprecedented money printing, and the long-run value of the U.S. dollar - but now, the prospects for a short-term run is a very real possibility. Best of all, if the market is going down and the gold stocks are going up, they're going to attract a lot of the hot money.
There are no guarantees in the investment world, but you have to look for high potential opportunities. Gold is shaping up to be one of them in short- and long-term.
Chief Investment Strategist, Q1 Publishing
Editor's Note: Andrew has been actively covering the gold market for years. He has traveled to over a dozen different countries across four continents in the past few years looking at gold and other resource projects. Whether it's in the Arctic Circle on the wrong side of the Russian border or the part of Australia tourists just don't go to, you'll find Andrew there.
The five gold investments he has identified have significantly outpaced gold and gold stocks as a whole. Not a single one is down while one has quadrupled, one has tripled, and one has doubled. Claim your copy of this free report now.