According to experts, an indicator that gold stocks are prepared to rise is when the stock begins to track gold, rather than following broader markets. This is particularly evident when the market falls but gold stocks do not. There are statistics to reveal that this situation has just happened.
Between April 2009 and 2010, gold stock performance mirrored that of the S&P. Between April and June 2010, the price of gold stocks rose 11 percent. During this time the S&P lost 14.1 percent but the price of gold increased 10.7 percent. It seems that gold stocks are now separating from the stock market and beginning to follow the price of gold. This situation, which shows strength in the gold sector, has not occurred since the first quarter of the year 2009.
Experts point out that this is a short-term indicator but it puts investors on notice that gold stocks will not always be dependent on market performance. During the 1970s, while the S&P rose a mere 22 percent, the Barron’s Gold Mining index shot up 562 percent. It is not definite that a situation like this will occur again, but the signs are there of good things to come.
When the price of gold bottomed out in April 2001, there Dow/Gold ratio was a very high 41.2. As of July 2, this ratio was 7.9 and some analysts believe it is on its way to one. This situation occurred in January 1980, when the price of gold peaked. This meant that gold and the Dow were each selling for approximately the same price. It seems the price of gold will continue to go higher and the Dow will fall in a double-dip recession, making the achievement of a Dow/Gold ratio of one feasible.
This activity has a bearing on the type of investments that should be made to maximize profits. Experts recommend bypassing conventional stocks for things such as inverse ETFs. Investors should purchase gold in the expectation of higher gold prices. They should also purchase gold stocks, even though they do have some vulnerability. If they pass by this opportunity, they may find themselves chasing these stocks.
Source: Casey Research.Clark, Jeff. Time to Board the Gold Stocks Train?
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