This is a concept that comes from Bob Hoye and we’ve written about it extensively. Bob believes that the real price of Gold is what is important for the gold stocks (NYSE:GLD) and not the Gold price. The real price of Gold is essentially Gold against Commodities. To be more precise, we look at Gold vs. Oil (Oil is 25% of the cost of mining) and Gold vs. Industrial Metals (a proxy for industrial costs).
See the chart below:
Notice the tight correlation between the bottom ratios and the GDX/Gold ratio? Gold’s real price surged into early 2009 putting the gold stocks (NYSE:GLD) in a fantastic position. Gold was near all time highs while costs plummeted. Yet, since mid 2009 Gold’s real price has essentially been flat and so has the GDX/Gold ratio.
The real price of Gold tends to lead the GDX/Gold ratio by a few months. Presently Gold has bottomed against Industrial Metals and is trying to solidify a bottom against Oil (NYSE:USO). If that continues, over the next few months then it definitely bodes well for the gold shares by the beginning of the seasonally strong period (August-September).
Unlike many gold bugs who cry manipulation and intervention when something appears off course, we study the market to find a more rational and credible explanation. As we said in a recent editorial, there are some fundamental reasons as to why the gold shares are lagging. When the real price of Gold strengthens, a few months later the gold shares will exhibit better leverage.
Jordan Roy-Byrne, CMT
Another great read: Gold & Silver Premium Vastly Outperforms with 86.5% Return in 2010>>