Mining stocks – On the runway, ready for take-off

September 5, 2011 – Gold has been rising faster than the price of mining stocks. Here are some statistics to prove this point.

In the twelve months ending August 31st, gold has risen 46.5%, but the XAU Index of precious metal mining stocks climbed only 17.7%. By itself, that is a good rate of return for mining stocks, but not what one would expect given gold’s appreciation over this period.

The current year-to-date results are even more telling. Gold has risen 28.7% this year, compared to a -3.8% loss in the XAU Index.

In the last two months, gold has risen 21.7%, while the XAU Index climbed 8.4%. You might notice from these results that the XAU Index is finally starting to show some relative strength compared to its year-to-date results, which is one sign that things may be turning in favor of the mining stocks. Here is another.

The following chart simply measures the difference between the annual rate of change of gold and the XAU Index at each month end. So for example, using the 12-month results ending August 31st reported above, the last point plotted on this chart is 28.8%, which reflects gold’s outperformance over this period.

There is an important message from the above chart. Namely, gold’s relative outperformance compared to the XAU Index has reached a level that in the past has marked important turning points. If we take the period in 2008 relating to the collapse of Lehman Brothers as an unusual exception and not likely to be seen again – or at least not to be seen at the present time – we can conclude that gold’s outperformance has reached an extreme.

It is not uncommon for the XAU Index to underperform gold from time to time, which is clear from the above chart. But just like night follows day, relative valuations and performance turn when they reach an extreme. We appear to be at one of those turning points for gold and the XAU Index.

I expect gold to continue climbing higher. That is after all, its primary trend. But look for the price of the mining stocks to start climbing even more rapidly than gold. The mining stocks are on the runway and ready for take-off.