The Secret Clue That Tells Me Gold Should Rally Hard — Gold Stocks Outlook

The Secret Clue That Tells Me Gold Should Rally Hard — Gold Stocks Outlook

If you’re going to invest in gold stocks, you need to know what I am about to tell you.

Market dynamics in the last two years have changed big time.

We are seeing inflation creep into the economy and across (literally) every asset market.

You need to start thinking about using gold in your portfolio. And if you’re looking for an edge over other investors, keep reading…

Gold to be a trailblazer?

We need to go over some small history first.

Look at the relative performance between the gold price and the Van Eck Gold Index [US:GDX] since January 2015 in the chart below:

US Dollar Gold Vs GDX

Source: Thomson Reuters Refinitiv Datastream

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The graph shows the gold price and the GDX moved largely at the same time from 2015 to early 2018.

Then the gold price led the GDX down in mid-2018. This changed with the rally in May 2019.

Many gold stocks whipsawed during the COVID panic as the market panicked. Meanwhile, the gold price steadily climbed. The recovery in mid-March for gold stocks followed the rally in gold all the way to August.

Then things got wobbly for gold investors. Physical gold recovered while gold stocks continued to decline.

That’s because there is a multiplier effect on the profit margin of mine operations to changes in the gold price.

That’s the history. Now to today’s profit opportunity…

The question awaiting an answer is, who will take the lead: gold or gold stocks?

Let’s look at the Aussie gold market next…

The chart below compares the gold price in Aussie dollar terms with the ASX Gold Index:

AUD Gold Vs ASX Gold Index

Source: Thomson Reuters Refinitiv Datastream

[Click to open in a new window]

REVEALED: What’s Next for Aussie Gold Stock Prices? Learn more.

Let me remind you that the AUD gold operates on slightly different dynamics to the USD gold.

It’s important to note that the AUD gold is a second-order measure. It’s not a leading measure, instead deriving its value from the USD gold price and the USD–AUD exchange rate.

The ASX Gold Index appeared to follow the Aussie dollar gold price for much of 2015–19. This is because these companies’ profit margins are driven by the gold price, and many of these companies report their financial results in Aussie dollar terms.

What’s interesting from mid-2019 onwards is that the gold price in Aussie dollars seemed to take the lead on the gold stocks. However, it is not much of a lead. They move in the same direction with little delay, except of course in late-February to mid-March 2020, when gold stocks tumbled hard.

You will notice that in the last two weeks, ASX-listed gold stocks diverged from gold and continued to decline as gold recovered after that shock sell-off. Gold traded near its highs this year at AU$2,500/oz.

Many are now wondering where gold and gold stocks will travel going forward. It appears they are now at a crossroads. Gold seems to hold ground while gold stocks are treading water.

I am buying — and recommending — certain gold stocks in a big way because I see more opportunity profiting in gold stock investments than in the gold price. (Of course, the likelihood of losses is also more substantial, but you know that.)

Why am I doing this?

Fundamental economic driver…with a twist

The price of oil tells me too!


Yep! The price of oil can be helpful clue.

Think of oil as a barometer of business activity and confidence. The gold price is the reverse.

Thus, if you combine gold as an indicator of business confidence and oil as an indicator of economic activity, you may have an intuitively sensible economic measure.

You effectively kill two birds with one stone.

Divide the gold price by the price of oil and this gives you the gold-oil ratio. It is the same as saying how many barrels of oil can you buy with an ounce of gold.

Check out how this metric helps explain the movements in gold stocks. I compare it against the GDX and the ASX Gold Index:

GDX Vs ASX Gold Index

Source: Thomson Reuters Refinitiv Datastream

[Click to open in a new window]

You can see that the gold-oil ratio seems to do a good job leading the gold stocks.

A higher gold-oil ratio often boosts the returns of gold stocks a few months later. The spikes and troughs in the gold-oil ratio causes subsequent moves in gold stocks.

Right now, the gold-oil ratio is starting to head up again. You can see it since early June, despite the gold price behaving strangely.

I’m backing this indicator — and many others — to say now is the time to swoop in and pick up certain cheap gold stocks for the anticipated rally to come.

God bless,

Brian Chu Signature

Brian Chu,
Editor, The Daily Reckoning Australia

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