I confess I can't see this in the charts at all - at least not since GDX has been around. Take 2008: GDX crashed to all-time lows while gold held above its 2007 trading range. Both bottomed out within the same week or two. Obviously to the extent that gold demonstrated consistent strength it was 'leading,' and has been doing so for the past four years. The winning trade back in 08 was to consider GDX undervalued vs. gold rather than the opposite.
Only the most recent timeframe shows this because of this very recent spike in GDX. All other timeframes show gold outperforming. For the purposes of this thread, I would consider two years to be a decent time horizon. Over the past two years, gold has clearly beaten GDX like a gong. To be truthful, I don't have a short on it; it's a US election year after all. But post the first week in November I'll go short unless GDX does consistently start beating gold between now and then.
This doesn't make conceptual sense to me. First off the, the gold mining industry is tiny. The top ten gold miners combined have a market cap less than half that of AAPL. Second, future prospects for gold miners are related to gold price projections, i.e. how much value can be assigned to "gold in the ground." A rise or fall in the price of gold, net of production costs, is what drives gold miner profit expectations. So for miners to lead gold would be like the tail wagging the dog. Third, there are environments that can be extremely favorable to gold but extremely unfavorable to gold stocks, for ex. runaway inflation periods where the gold price is skyrocketing, but so too are production costs via energy inputs ($200 bbl oil etc.), or on opposite side deflationary environment where CBs are "pushing on a string" and gold is responding positively as neutral currency not being debased, but gold miners are getting whacked on portfolio contagion and risk off dumping. Fourth, gold has a track record spanning thousands of years and is constantly talked about, referenced as a crisis gauge etc -- who the hell is paying that much attention to the miners? Fifth, gold miners have serious flaws as a potential macro gauge in the sense that management is often the company's own worst enemy, through stupid value-destroying decisions, re, overexpansion, paying too much for speculative properties, etcetera. Sixth, gold stock investors themselves emphasize the fact there is a huge quality gap between the best managed and worst managed miners, and this just becomes more problematic in terms of expectations for gold stocks as a leading indicator. Seventh, anecdotal instances of inflection point price action seem to belie your claim. On February 29th -- the day that Bernanke gave gold the biggest single-day percentage whack in decades -- the decline in GLD, in adjusted volatility terms, was much, MUCH larger than the corresponding decline in GDX, leading to multi-month downtrend in both. Same thing on the June 1st surge: Gold led, in volatility adjusted comparison terms, on the upside push. . As Monroe Trout said in NMW, if your data dive shows a correlation between the British Pound and frozen OJ, that doesn't necessarily mean you pay attention to it. I am genuinely curious as to what a plausible explanation might be as to why your assertion would hold true.
That's the part that explains it. So if miners are persistently declining vs gold, as they have been for quite a while, that means the future price of gold is projected to be lower than what it is today. The sequence has always been, at major turns: gold miners first, then gold, then the dollar. Gold miners turned in November of 2000. It was two or three years before gold really took off, and as I recall (I'd have to go back and look) another year before the dollar began to persistently decline.
Because on the one hand you said "the miners have been signalling for quite a while that the direction of least resistance is down," while on the other hand you concede that GDX has been lagging for many years during which the gold price has steadily risen (in the past 6-12 months of course it's been more like sideways). ...I still can't see it. Using $HUI, the miners don't seem to have 'lead' in the 2000 turn. In fact, in a pattern very similar to 2008 and so far in 2012, the HUI collapsed by 50% during the year 2000 while gold held above the lows set in 1999. In both 2000 and 2008 the relative strength of the metal correctly signaled many years of rising prices to come in both. The relative weakness in the miners doesn't seem to have signaled anything, other than a striking tendency for gold mining stocks to become massively undervalued at times.
Still doesn't fit. Let's say a major geopolitical event -- like escalation of a Middle East conflict -- causes the gold price to spike $100 an ounce overnight, and trade at a higher level for a few months subsequently thereafter. Miners will not forecast such a spike, and they may not even incorporate the new, higher level of gold price into projection forecasts, until such time as markets become convinced that the higher gold price is here to stay, and not a temporary thing. To get a sustainable change in long-term projections for gold miner profits, the market needs to be convinced that gold has phase-shifted to a higher baseline plateau. Meanwhile, gold can move around for all kinds of reasons -- like a cat on a hot stove -- in response to near-term events. Another way to conceptualize this is that gold is the fast moving average and miners are the slow moving average. The slow moving average is not going to lead. I would be skeptical of any iron-clad statements about large-scale correlations at the macro level. Situational dynamics are too fluid -- there is rarely an "always" when it comes to major market correlations across the full panoply of backdrops. Now that just ain't true. See below
Your charts show NEM and GG bottoming when I said. ABX didn't, but at the time they were the known hedgers. What was your point?
Well, we'll have to agree to disagree here. Gold did nothing because below 350 any movements it would have had would be more or less random, as that was the price below which the miners in the aggregate would make zero profit at that time. Despite that, the miners began a sustained run in November of 2000. For no reason that anyone at the time could come up with. Gold prices only confirmed that later. The situation is the opposite now: gold miners have been persistently underperforming for a very long time, and I think every reason in the book has been trotted out for this underperformance. But just like in 2000, gold should confirm. As I said, the only point at which I would change my mind about shorting it after the election is if GDX managed a sustained outperformance between now and November.