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Why Gold Stocks Are Underperforming Gold

By Dr. Steve Sjuggerud
Friday, March 3, 2017

Gold stocks are down 11% since February 6... But gold prices are up 1%.
Normally, when gold goes up, gold stocks go up even more... But that doesn't always happen.
Why not? What's going on?
I explained it in late January in my True Wealth newsletter: "For the first time in nearly a year, we have the 'all clear' to buy gold," I wrote.
Note that I said "gold" – not gold stocks.
"Gold stocks are still too loved for my tastes," I wrote later in the issue.
To understand what's going on, we need to make a distinction here between gold buyers and gold-stock buyers. In short, they haven't been behaving the same recently. Here's the full story...
When the price of gold was falling in late 2016, gold buyers gave up on gold – which allowed the price of gold to bottom.
Gold-stock buyers acted differently. They never gave up on gold stocks. Instead, they kept "doubling down" and adding more to their positions.
One way to see it is to look at the actions of investors in the main gold exchange-traded fund (GLD) and the main gold-stock ETF (GDX).
Here's what I wrote in January...
In the case of gold, they're scared. They're taking their money out, and fast. [The shares outstanding have] been declining... falling 18% from last July through today.

Meanwhile, the opposite happened with gold-stock investors...
While gold is hated, gold stocks aren't... not even close. Gold stocks have become more loved as they have fallen in price over the past six months. The chart below shows this phenomenon. It's the shares outstanding for GDX and GDXJ – the two major gold stock ETFs. Take a look...

I didn't recommend gold stocks when I recommended gold. I expected we'd see gold stocks struggle to outperform gold. (Of course, I didn't think they'd fall by double digits over the course of a month when gold was up, either.)
As I said in January, "Gold stocks are still too loved for my tastes."
After a month of terrible underperformance, gold stocks are a little bit less loved... but not enough for me to be a buyer just yet.
If you've read my writing for any length of time, you know that I look for things that are not only cheap, but also hated. Gold stocks don't qualify, just yet...
Good investing,

Further Reading:

In mid-January, Steve called gold – not gold stocks – a buy again. It fit his three criteria for the perfect investment. Read more here.
"Gold and silver both bottomed the day after the U.S. Federal Open Market Committee raised rates in mid-December. And they've climbed higher ever since," Ben Morris writes. As he explained, it could be the start of the next big leg higher for both gold and silver. Get the full story here: What to Do With Gold and Silver Today.

Market Notes


Today's chart highlights one of the best uptrends in the market...
Regular readers know we are always looking for big secular trends to invest in. Since the invention of the personal computer and the cellphone, the demand for semiconductors has been growing... These little devices power most of the electronics we use today. And with the rapid growth of smartphone users around the world, it's clear that "semis" are fueling a dominant, thriving tech trend.
We last checked in on this trend with the iShares PHLX Semiconductor Fund (SOXX). Today, we'll look at $87 billion industry leader Broadcom (AVGO). The company designs, develops, and supplies semiconductors and circuit boards.
Broadcom shares have soared in recent years. As you can see in the chart below, they're up nearly 520% since 2012, and they just hit new all-time highs. Each time Broadcom sold off in recent years, the stock quickly rebounded and climbed to new highs. It's one of the best uptrends in the market today, and one that shows no signs of slowing down...

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