The following is excerpted from a commentary originally posted at www.speculative-investor.com on 9th May 2013.
The last long-term bull market in gold-mining stocks, which ran from the early-1960s through to 1980, occurred in parallel with a major upward trend in interest rates, a steady undercurrent of “inflation” fear, and the occasional dramatic “inflation” scare. However, the current — we think it’s still current, although this won’t be proven until the gold-stock indices exceed their 2011 peaks — long-term bull market in gold-mining stocks has unfolded in parallel with a major downward trend in interest rates, a steady undercurrent of “deflation” fear, and the occasional dramatic “deflation” scare. These differences could have — and preferably would have — resulted in gold-mining stocks performing differently relative to gold and the broad stock market during the current bull market than they did during the last bull market, but that wasn’t to be. Gold-mining stocks are putting in a similar showing this time around.
The following weekly chart of the BGMI/gold ratio (the Barrons Gold Mining Index relative to the bullion price) reveals that the gold mining sector did very well relative to gold during 1964-1968 and then embarked on a substantial long-term decline. The major bottom for the BGMI/gold ratio actually coincided with the major peak in the gold price in January of 1980, at which point the gold-mining stocks commenced a 2-year rally relative to gold. Something similar has transpired during the current bull market, in that strength in the gold-mining sector during the first few years of the bull market was followed by a substantial long-term decline.
Notice that BGMI/gold’s long-term decline of 1968-1980 was interrupted by two meaningful (1-2 year) counter-trend rallies, one during 1970-1971 and the other during 1973-1974. To date, the long-term decline in BGMI/gold that began in 2006 has only been interrupted by one meaningful counter-trend rally (the sharp 12-month rally that began in October of 2008). It’s a good bet that a second counter-trend rally will begin this year — from either an April-May low or an October-November low.
The next chart reveals that while the BGMI/SPX ratio (the gold-mining sector relative to the broad US stock market) trended higher during the 1960s and 1970s, there were two substantial counter-trend moves. The current long-term upward trend in the BGMI/SPX ratio is immersed in its first substantial counter-trend move.
The bottom line is that rather than being evidence that the gold sector’s long-term bull market has come to an end, the recent extreme weakness in gold mining stocks relative to gold bullion and the broad stock market is consistent with what happened during the middle stages of the last bull market.
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