The leverage between gold stock and gold
Steven Jon Kaplan did some digging into the relationship between gold and gold stocks. He looked at the magnitude of the moves in stocks vs the price moves in gold and sees that currently we the stocks are trading at 7X multiples which he thinks is pointing to a continued run in the market. We also touch on the the commercial short position and if he thinks it is a worthwhile indicator.
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Confused– I appreciate your compliment. It is important to always study the history of any alleged indicator to see if it has proven merit. Since there is zero correlation over a period of decades between a heavy commercial net short position for gold or silver and a subsequent price drop, it makes no sense to claim that it has any value. –Steve
I really appreciate the way Mr. Kaplan thinks. Also like his explanations and input on ‘commercials’ and their future positions. Refreshing to say the least over the standard drivel and explanations we hear on the majority of articles and commentators. Thanks for having him on your program.
Kaplan is a very astute man and a credit to our industry!
Al– That is a wonderful compliment and I hope it is deserved. –Steve
It certainly is deserved, Steven.
Silverdollar– I really appreciate your kind and thoughtful words. I spend a lot of time researching the history of numerous claims about correlation and have found that most of them are false. I will be delighted to appear on this forum as long as Al and Cory will put up with me. –Steve
The leverage that the miners offer tells us a lot about what kind of market we are in. One of the many reasons that I “know” that 2011 did not mark the secular top is that the leverage offered by the miners was miserable.
Example:
From the 2010 low to the 2011 high, silver went up 240% while AXU went up 269% for an insulting 1.2x leverage.
The last 6-7 months have been very different. From trough to peak, silver gained about 32% while AXU gained 557% for a true bull market leverage of 17.4x – THAT is more like it. Why own risky miners at all if the potential gains aren’t substantially greater?
Great point Matthew. I’m in the risky miners exactly for that kind of leverage, and we are FINALLY starting to see it here in 2016. Fun times!
Excelsior– Stay invested as long as the “leverage”, actually a high ratio of outperformance, remains. Whenever it persistently contracts to below 2:1 and especially below 1.5:1, it is usually time to sell and wait for the next bull market. –Steve
Matthew– Actually most bull markets for gold and silver mining shares will feature high ratios of gains relative to gold bullion in their early stages, and very low ratios in their late stages. This is especially useful since it gives you helpful buy and sell signals. Prior to Friday, GDXJ had gained 7.5% for every 1% rise in the gold price from their respective bottoms of January 20, 2016 (1067 gold, 16.87 GDXJ). On Friday, the ratios were near 1:1, indicating short-term weakness for gold which will likely happen as gold and silver mining shares keep recovering from early selloffs. At some point, perhaps in 2017, the ratio will contract to 2:1 or less, signaling that an exit strategy has become appropriate. –Steve
Mr Kaplan, thanks for clearing up an issue that several folks on this site have been using to “prove” that the gold price is/was/will be doomed. I regularly see members here spewing about bearish indicators of the COT. Some even trott out qualified technicians like Dan Norcinni to prove their bearish calls. If two or three indicators is all you needed to predict the future prices of any commodity, then everyone would be trillion airs. Thanks for injecting some sanity into this subject!!!