Gold Should Lose Its Midas Touch

Gold Stocks

The stocks of commodity producers relative to the market as a whole often trace the path of a call option on the underlying commodity. We expect them to rise earlier and faster than the commodity itself, and then fall more slowly when the commodity price itself falls as the producers close down higher-cost facilities. This was the case for gold stocks for years.

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The recent rally in gold has provided an exception to this expectation, however. The Philadelphia Gold and Silver index's performance relative to the broad Russell 3000 has failed to match the move higher in bullion prices. These stocks have been major underperformers during the biggest gold rally in more than two decades, and that confirms once again that if you want to trade commodities, trade commodities and not commodity-linked equities.

Oh, that phrase annuit coeptis on the Great Seal translates to "God has favored our efforts." I doubt that will buy you much time with your compliance department or risk managers, so if you are planning to go short gold, use a buy stop.

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