This is a concept that comes from Bob Hoye and we’ve written about it extensively. Bob believes that the real price of Gold is what is important for the gold stocks and not the Gold price. The real price of Gold is essentially Gold against Commodities. To be more precise, we look at Gold vs. Oil (Oil is 25% of the cost of mining) and Gold vs. Industrial Metals (a proxy for industrial costs).
See the chart below:
Notice the tight correlation between the bottom ratios and the GDX/Gold ratio? Gold’s real price surged into early 2009 putting the gold stocks in a fantastic position. Gold was near all time highs while costs plummeted. Yet, since mid 2009 Gold’s real price has essentially been flat and so has the GDX/Gold ratio.
The real price of Gold tends to lead the GDX/Gold ratio by a few months. Presently Gold has bottomed against Industrial Metals and is trying to solidify a bottom against Oil. If that continues, over the next few months then it definitely bodes well for the gold shares by the beginning of the seasonally strong period (August-September).
Unlike many gold bugs who cry manipulation and intervention when something appears off course, we study the market to find a more rational and credible explanation. As we said in a recent editorial, there are some fundamental reasons as to why the gold shares are lagging. When the real price of Gold strengthens, a few months later the gold shares will exhibit better leverage.