The banks which were edging towards the brink of collapse just last week and bringing stocks around the world down with them are now bouncing back.
The price of gold fell 4% from it’s highs last week and Wall Street is naturally extrapolating the current three day trend indefinitely into the future.
Something odd happened though when gold prices dropped this week.
Few have noticed it. But it could be signaling a big move ahead for gold stocks regardless of where gold prices head from here.
Don’t Buy Gold Until You See This Chart
Up until this current dip, gold’s remarkable strength brought buyers back to gold stocks in a big way.
While gold prices climbed 15% this year, the Philadelphia Gold and Silver Sector Index (XAU) rose 48%.
That’s a big move, but it’s nothing compared to what’s coming next.
Gold stocks have been cheap for a long time.
Ever since gold prices peaked in 2011, gold stocks have been relatively cheap compared to the price of gold because the last part of the parabolic run-up in gold in 2011 wasn’t accompanied by an equally large run in gold stocks.
Gold prices moving up faster than gold stocks says the best case scenario is already baked into gold stocks.
When you see that happen, historically the next move for gold stocks is down.
And it was. The year after the 2011 peak, gold prices dropped. Gold stocks fell even more.
Then it happened again. In 2013 gold dropped and gold stocks fell even more.
Then again in 2014.
It was a big problem for value investors watching it all. Gold stocks were cheap. But they kept getting cheaper.
Then last year, it got to an extreme. Gold stocks weren’t just cheap, they were historically cheap.
The recent price move in gold and change in sentiment towards it could spark a major turnaround in gold stocks. And the capital appreciation potential from current historically depressed cycles is exponential.
Here’s a chart to show you what I mean.
This chart tracks the ratio of the XAU (the gold and silver stock index mentioned above) relative to the price of gold.
When this ratio is down, gold stocks are cheap. When it’s up, gold stocks are expensive (source):
As you can see, gold stocks were recently the cheapest they’ve ever been.
Gold stocks have recovered a lot since then. But even a 48% recovery so far isn’t much relative to the price of gold.
At this point, gold stocks would have to triple just to get back to their historical average prices relative to the price of gold.
And if gold is going back to new highs, you’re looking at 500% to 600% gains for the entire sector.
If you want to buy low, gold stocks aren’t just low, they’re still in historically low territory.
If you think the real drivers of gold prices are going to keep gold prices on the upswing, you better take advantage of the current dip to get some now.