A Vein of Gold Profits?

You’d be forgiven if you thought new life’s been blown into gold mining stocks. While bullion’s been fibrillating between $1,200 and $1,400 – mostly near the middle of the range – the miners have soared. Well, some miners anyway.

A couple of exchange-traded funds (ETFs) represent the miners spectrum. The Market Vectors Gold Miners ETF (GDX) tracks an index of more than three dozen large-cap gold producers. Exploration and development companies – five dozen of ‘em – comprise the Market Vectors Junior Gold Miners ETF (GDXJ). Think of GDX as the “blue chips” of the mining world while GDXJ represents venture capital. You’d expect blue chip issues to be less risky than VC investments, right? And so it goes with miners. Investors aggressively bullish on gold are more likely to risk their money on junior miners rather than more stolid producers.

Back on Feb. 3, we published “Digging For Gold Mining Stocks," an article reviewing the prospects of gold mining stocks. Since then, bullion’s gained a paltry 3.2 percent while GDX rose 14.8 percent. GDXJ, meantime, appreciated 20.1 percent (versus a 13.1 percent uptick in the S&P 500). You can see the relative strength of GDX and GDXJ against bullion in Figure 1.

After losing ground to bullion for months (um, years) there finally seems to be some serious base building going on for the miners. Seems. Figure 2 depicts the risk appetite of gold stock investors. It’s really nothing more than an indexed ratio of GDXJ’s price against GDX’s. While the index has broken a three-year downtrend line, it has some further upside work to do to break above some intermediate-term resistance levels.

That’s not to say that all of the miners are dithering. Topping the list of gold miners “best picks” in the February article were Gold Resource Corp. (GORO) and Randgold Resources Ltd (GOLD). GORO’s gained 30 percent while GOLD’s picked up 22.4 percent. Clearly, these issues have already done a lot of work.