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.
Better Opportunities Elsewhere?
Looked at in the broader context of what’s been happening in the entire commodity-stock complex, a return of a risk-on market might bring better performance for silver and energy stocks than it would for the gold miners.
First, consider that on an absolute basis, the leading silver stocks have been pounded to a much greater extent than the leading gold stocks, providing the potential for more beta in a relief rally: Through Friday, the Global X Silver Miners ETF (NYSE:SIL) was down 13.22% month-to-date in November, versus -2.35% for GDX.
In addition, the leading silver-related names are down much further year-to-date than the top gold names:
Click to EnlargeSecond, silver stocks outperformed their gold counterparts by a wide margin the last time the “risk-off” market turned on a dime. While GDX posted a healthy return of 6.6% in October, this was dwarfed by the 14.79% gain for SIL.
Consider the gaudy October returns put up by the silver names mentioned above: SLW, 17.5%; CDE, 19.3%; PAAS, 4.45%; HL, 17.1%; SSRI, 6.8%.
Click to EnlargeAlso, given that gold stocks’ divergence from the metal largely occurred in the first half, it might pay to look for areas where a performance gap has opened up more recently. And on this front, energy is the winner. While the United States Oil Fund (NYSE:USO) had gained 3.97% in November (through Friday), the Select Sector SPDR-Energy ETF (NYSE:XLE) had lost 8.43%.
The bottom line: There’s no doubt that gold stocks can provide some juice in a rising market, but any recommendation for this sector needs to incorporate the larger picture and the potential opportunities elsewhere in the commodities space.
