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The HUI Indexed precious metal mining stocks traded by the ETF GDX soared more than gold today to a near an all time high.
The GDX relative to GLD relationship is now back to the October 8th, Citicorp CDO Bust level. After that,the GDX:GLD level rose, but when stocks turned down in November, the HUI Indexed precious metal stocks fell with the stock market as well; this provides evidence that the leverage effect wears off in a bear market. And given that authors Tim Wood and Richard Russell document a 'primary bear market', its more timely than ever to heed sound investing axiom: buy low sell high.
The Horizons Gold Stock Bull ETF which is 200% of the gold stocks has gone up 50% in seven trading days
The Barrick Gold to Russell 2000 divergence shows the investment mania at the end of a bull market run-up in stock market investments; the GDX to IWM divergence has risen to 33% since the October 8th Citicorp CDO Bust. The divergence is much like a rubber band that can be expanded so far -- there are limits in all things. This divergence reflects 'capital overextension': risk capital has 'gone to the max' in gold stocks; and practical capital has 'fled to the max' from small and credit sensitive U.S. based companies.
The gusher of capital flowing into the gold stocks today reflects either irrational exuberance or day trading speculation of a stock market top; this is especially the case when one is cognizant that the banks are basically insolvent, and that the Russell 2000 stocks -- the small U.S. companies, are on the brink of a cliff as can be seen in their weekly chart.
This Yahoo Finance chart shows capital poured into the gold stocks, and capital flowed out of the Russell 2000 today.
Another reason for
concern with the gold mining stocks, is their high P.E. ratio; while the
gold stock mining ETF has a PE of 33, which in itself is high; the top
gold mining stocks have sky
high P.E.s; this puts them at high risk in a bear market. The only gold stock that pays any reasonable dividend level is Goldfields, GFI, at 1.80% and trades at a PE of 28. For perspective, Exxon Mobil pays a dividend of 1.40%, and has a P.E. of 14. When there are just a few gold stocks trading at twice the PE of Exxon Mobil for basically the same dividend, one can see the risk of investing in the gold stocks should they loose their leverage value. Investment
Application For further details on the long gold and short stocks, including the gold stocks, investment strategy click here. Here is a down loadable internet database of the stocks and ETFs I recommend short selling; these sells have garnered 0.72% in just a few days of trading so far this year.
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