A Hidden Indicator for Gold… And What It Means for Gold Stocks

By Brian Hunt and Ben Morris, co-editors, DailyWealth Trader

In the earliest stages of big gold rallies and bull markets, gold stocks tend to outperform…

And they outperform in a big way.

This is an important point in analyzing where the precious metal stands today… and what it could mean for your profits in gold stocks going forward.

To get a little historical context, let's start by looking at the great gold bull market of the 2000s…

On April 2, 2001, gold bottomed at $256.60 an ounce. It was the lowest price in 20 months… and just 1% above its lowest price in more than 20 years. Over the next seven years, gold soared 291%.

  It was an incredible run. But by the beginning of that run, gold stocks had been rising for close to five months. By early December 2003, gold stocks had already risen 614%.

  Gold stocks continued to rise through gold's 2008 peak… But these three years – which ended before gold had even doubled – saw the biggest, most rapid advances in gold stocks.

Fast-forward to 2008. Gold peaked at just above $1,000 an ounce. This was, as we said, 291% above its 2001 low. It then fell 30% during the financial crisis… before continuing its bull market. It soared to $1,900 an ounce… 170% off its 2008 low.

  What happened to gold stocks? They fell harder. Then they ripped higher… again, in the early stages of gold's rise. By the time the price of gold had climbed 73% off its 2008 low, gold stocks were up 237%.

  So you can see that two times in recent history, gold stocks have far outperformed gold in the early stages of multiyear gold rallies. But how does this help us understand where gold and gold stocks stand today?

Well… let's take a look at all this information in a different way. It's called the "gold-stocks-to-gold ratio." Most folks don't look at ratio charts like these… But they can be extremely valuable.

In the long-term chart below, you can see how gold stocks have performed relative to gold. When the ratio is climbing, it means gold stocks are outperforming gold. When the ratio is falling, it means gold stocks are underperforming gold.

There are two periods that stand out. The period from late 2000 through late 2003… and the period from late 2008 through late 2009. These are the periods in the second and fourth charts above, when gold stocks far outperformed gold.

  If a major move higher in gold is about to get started, we would expect to see gold stocks outperforming gold. So let's look at what has been happening with the gold-stocks-to-gold ratio lately.

As you can see in the chart below, gold stocks have outperformed gold over the last three months. The ratio may be starting an uptrend.

  This is a good sign. If the ratio continues to rise, we could be in the very early stages of the next big gold rally… and gold stocks could soar hundreds of percent.

If it doesn't, it's probably best to hold off on new gold-stock purchases for now.

An uptrend in the gold-stocks-to-gold ratio is an indicator that's not on most folks' radars… But it often signals fantastic times to get into gold stocks.

Regards,

Brian Hunt and Ben Morris