This Major Disconnect Could Mean Big Profits For Gold Investors
StreetAuthority | May 02, 2012 12:37AM ET
Let's waste no time. Take a look at this chart...
The black line is the Market Vectors Gold Miners (NYSE: GDX), an exchange-traded fund (ETF) that holds shares of major gold miners such as Barrick Gold (NYSE: ABX), Newmont Mining (NYSE: NEM) and Goldcorp (NYSE: GG). The red line is the SPDR Gold Trust ETF (NYSE: GLD), which holds physical gold bullion and is meant to track the price of gold..
One year ago, GDX was much higher in price relative to its current value, while GLD was lower. In fact, GLD is modestly up, compared to a year ago, by about 6%. GDX is down some 25% during the same time period.
What are we to infer from this data? Well, it's one of two things: either GLD (meaning gold) is overvalued, or the miners (GDX) are lagging the price of bullion and are destined to return to some form of parity with the metal of all metals.
Before I pontificate further, let's look at another chart...
This is a far more striking visual. Here we again have GLD's performance during the past year, but this time compared with the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ), which holds shares of smaller gold miners. While GLD is up 6% during the past year, the juniors (GDXJ) are down a whopping 40%.
If you have traded these securities during the past few years, then you have to be impressed. But as much as some may want to quibble with my opinion, I do not think the story has changed much for gold. That's why I think GDX and GDXJ are undervalued -- and likely to catch back up to gold quite soon.
Gold prices will not go back to $250 per ounce. I don't think they will fall back to $1,000 per ounce again, either. I will be amazed if gold even manages to drift below $1500.00 per ounce.
Why, you might ask?
I call this my theory of finite wealth.
If you've ever read about the theory of finite energy, then you know the idea is that there is only so much energy to go around. The idea is that if a whole bunch of energy is expended in the summer, let's say during hurricane season, for example, then there will be less energy available in the winter (and moisture) to produce snow.
With paper money, that fictional entry in the U.S.A.'s massive computer system, there is the same effect. You can't create wealth, you can only create currency. The more you create, the less it is worth. The value of the money will, in terms of buying power, continue to decline. Real wealth cannot be created that way. The beneficiary of such money manufacturing is real assets. And despite what the naysayers believe, gold is the perfect arbiter of value.
Many have claimed that gold is a relic because it has no use other than as money. Exactly -- if it had any other use, then it would not be useful as money. Look at silver. It has industrial uses. It is not "just" a precious metal. As such, its price will fluctuate for many reasons other than monetary influences. It cannot be used exclusively as money. Gold can and will continue to be used for that very purpose.
As such, it is not likely to lose much of its current value. On the contrary, it is more likely to resume its ascension to much higher valuations. Why again?
Do you really think the European crisis is resolved? Wasn't it just announced that the United Kingdom entered into a double dip recession? Are we really certain that the U.S. economy has turned the corner?
Sure, Federal Reserve Chairman Ben Bernanke just raised its estimate for gross domestic product growth in the United States, but didn't they also say that they stand ready to "do whatever it takes" to ensure that this "recovery" continues? If the economy was really in recovery, would it really need the Fed to stand ready to artificially inflate it a little more?
There are big changes heading our way. And the greatest fear is that no one knows what will truly be the end result. China and the other emerging markets are expected to not only continue to provide the best growth opportunities for investors, but to also continue to grow in prominence and influence on the world stage.
The Currency Wars are here. And gold will be the beneficiary.
Risk to Consider: Gold could decline, and mining stocks could fall further. The basis for this trade is the belief that gold has probably found a new support level, one to which the miners will adjust. If that support level proves to be lower than where it is, then mining stocks could also find lower levels.
Get The News You Want
Buy GDX and GDXJ. Gold isn't going away, and the miners will likely eventually change course and catch up with bullion. Gold is here to stay, and if you want to be positioned properly for an uncertain future for the U.S. Dollar and the other major currencies, then you should own the miners in addition to bullion.
by Steven P. Orlowski
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