Gold Stock and Gold Bullion Divergence

Gold stocks have underperformed the metal most of this year... but the breakdown has been glaring since early April.

“Short-term aberrations in markets are common,” says U.S. Global Investors chief Frank Holmes, “and this isn’t the first time gold bullion and gold equity prices have diverged.”

“Gold equities underperformed gold bullion in 2000 and 2008 during times of extreme market negativity and uncertainty. These previous instances have been merely temporary setbacks, and markets generally reverted to their long-term trends.”

Here’s a chart Frank believes tells the full story: “Historically, one could purchase about 4.4 units of the XAU for the price of an ounce of gold. That ratio fell to less than 3 units per ounce in the mid-1990s, when gold prices bottomed, but has averaged 5.2 units during the current bull market.”

“You can see from the chart,” Frank continues, “that today’s level is 46% above the historical norm at 7.6 units to one ounce of gold. By this measure, one can purchase shares of gold mining companies at their second-cheapest level in nearly 30 years.

“The extreme was in 2008 during the depths of the financial crisis; many share values quadrupled off of those levels.”