Over the course of gold’s bull, the companies that explore for and mine this metal have greatly prospered. The gold-stock sector has thus been one of the top-performing in all the markets over the last 10+ years, and its investors have been richly rewarded. But this last year or so has been a tough one, one that sure has tested investors’ mettle.
Gold stocks had been doing great since their panic lows in 2008. Measured by the venerable GDX Gold Miners ETF, gold stocks were up nearly 300% to their late-2010 highs. This well outpaced the gains of both the general markets (+86% as measured by the S&P 500) and gold (+100%) over this time. But once 2011 rolled around, gold stocks’ powerful upleg started stalling out. Even though gold prices stayed strong, the gold stocks succumbed to weakening global equity markets and a weakening commodities patch.
Fifteen months later, now entering Q2 2012, gold has held steady and the S&P 500 has enjoyed an excellent two-quarter run that has brought it to new cyclical-bull highs. These conditions should have boded well for gold stocks. But as you can see in the chart below, they continue to languish in their slump. And the juniors in particular have been getting crushed.
Illustrating this gold-stock malaise are the performances of three of the top gold-stock ETFs that capture the various stages of the gold ecosystem. GDX is comprised of the world’s biggest and best gold stocks, the bellwether producers. The GDXJ Junior Gold Miners ETF is comprised of some of the world’s finest small-cap producer stocks. And the GLDX Gold Explorers ETF is comprised of several of the world’s elite pre-production exploration stocks.
Over time gold stocks’ primary driver is gold. Rising gold prices usually lead to rising profits, which ought to translate into rising stock prices. And for producers and non-producers alike, rising gold prices increase the value of their in-ground assets. Consequently in a gold bull gold stocks tend to leverage the metal to the upside, and for the most part they have.
Unfortunately though there are seasons where this hasn’t been the case. And in the last year or so we’ve been entrenched in one of these seasons. As you can see, gold has performed quite nicely over the last 15 months. Since the beginning of 2011 it is up an impressive 17.2% to this week. This run encompasses a strong breakout to its all-time high of $1,894 in August, mixed with a few selloffs. All in all, a nice bullish uptrend.