Click to Enlarge Is it finally time to buy gold stocks? It could be, if you
believe the various articles and blog posts that continue to clog the Internet.
It's true that gold stocks have trailed the metal's price by a huge margin
on a year-to-date basis, which could provide the foundation for a convergence
trade in time. For now, though, there are three key points to consider before
making a move: The Divergence Trade Isn't Limited to Gold While gold stocks
garner more headlines, the outperformance of commodities vs. related equities
has been true across all sectors in 2011. Consider the following: This shows
that although the underperformance of gold stocks has received a
disproportionate share of attention, it's actually part of a much larger
story. Gold-Stock Convergence Essentially Is a Risk-On/Risk-Off Trade The
performance of the Market Vectors Gold Miners ETF (NYSE: GDX ) relative to the
SPDR Gold Trust (NYSE: GLD ) has, like everything else, become a derivative on
the risk-on/risk-off Europe trade. In the difficult month of September, GDX
trailed GLD by 1.06 percentage points, -11.06% to -12.12%. GDX subsequently
outperformed by 73 basis points when the markets recovered in October (6.6%
versus 5.87%), and now it is underperforming again in November (-6.87% versus
-2.35%). The same story holds true for the other commodities in the table above.
The takeaway is that any recommendation of a gold-stock convergence trade is
incomplete unless it accounts for the impact of the news flow out of Europe.
Until European policymakers can deliver a longer-term fix for the debt crisis,
it appears unlikely that gold miners will be able to outperform the metal for
more than a few weeks at a time.
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