Divergence Between Gold and Miners Continues: But for How Long?
James is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.
For about 18 months now there has been a sharp divergence between theprice of goldand the stock price of gold miners that is unsustainable in the long run. Taking into account the massive consensus that global inflation is coming, then it might be a good idea to revisit some major gold miners during these oversold conditions to look for a long term buying opportunity.
First let me illustrate exactly what I am talking about when I say a divergence. Looking at a three year chart (Figure 1), we can see the separation began in the spring of 2011 using theSpdr Gold Trust(NYSEMKT: GLD)and MarketVectors Gold Miners ETF(NYSEMKT: GDX).
Figure 1:
The main reason for the divergence seems to have been the slowdown in China, which had a negative effect on all basic materials stocks as a whole. For the record I am not saying this divergence is over. However, I believe it would be wiseto beginevaluating companies for when miners again find themselves in the market's favor.
For other ideas on how to play the China recovery see my articleBasic Materials: How to Play the Recovery.
Future macro economic conditions will benefit gold in the very long run. The reasons are many, but the majority revolve around shortsighted governmental policies that will only serve to prolong and compound the underlying problems.
Well-positioned miners with good management should benefit. But bottom calling is a scary business, which is why it's always nice to look for a company with solid value during these conditions. Fortunately this sector has been beaten down so badly that several companies are selling at what I consider bargain prices.
Barrick Gold Corp(NYSE: ABX)is the largest pure gold mining play. Looking at a long term chart (Figure 2), it's painfully obvious that ABX is currently trading at three year lows.
Figure 2:
However, looking over the books and the future plans for operations, I feel confident in this company's future, even without including the grim predictions of global inflation.
Allow me to sum it all up (Figure 3) with a table rather than a lengthy description.
Figure 3:
