Author: Michael Arold
Covestor model: Technical Swing
Gold (NYSE: GLD) and Gold Miner (NYSE: GDX) stocks are usually highly correlated in their share price movements. This correlation recently broke down, as can be seen on the chart below (point marked A).
As the rest of the chart shows, low correlations happened only once in the last ten years. in 2001 Gold Miner stocks put in a bottom and started to rally before Gold took off (B,C). Miners outperformed the metal for over a year.
The question today is of course if history will repeat.
From a historic standpoint, a low correlation is only a temporary phenomenon and I expect both asset classes to move in lock step again at some point. The key, in my opinion, is to monitor relative performance of the stocks to Gold (D): if Miners start to outperform (so far they haven't), a significant catch-up rally could take place. The alternative scenario, in order to re-establish positive correlation, would be for Gold prices to reverse, which doesn't look likely from a technical standpoint.
In any case, I keep miners high on my watchlist.
Chart from StockCharts.com