You may recall that I took the principal off the table in my gold stock positions some time ago, leaving positions representing past profits. In addition, you may remember my All that Glitters posts highlighting the downside risks in gold stocks that I believe are likely due to the negative stance of the precious metal stock timing model. Well I thought I would update you on another gold stock indicator I watch, namely the relative price of gold (here presented by the GLD) and Royal Gold (ticker RGLD).
This post is partially prompted by yesterday's volume off the high list, which included RGLD. As a brief review, RGLD is one of the best operators and most leveraged (to the price of gold that is) companies in the gold space. The company essentially acts as a broker for gold production of mining operations, contractually taking gold from miners at lower prices and selling into the market at higher prices. RGLD operates an asset-light business model, and in fact only has 19 employees. This asset-light business model means the company's- by not having the same fixed cost operating leverage of traditional gold miners, disproportionately benefit from rising gold prices, relative to gold miners. Due to this business model, RGLD's stock will tend to move inline with gold prices or the anticipated future path of gold prices.
I track this relationship over time, and I provide two charts showing this below. The first shows the price of the Gold Spider ETF (ticker GLD) relative to RGLD and the Market Vectors Gold Miners Index (ticker GDX). The second shows the same two price charts, but on a rolling six-month change. You will see that the price of the GLD relative to RGLD has exhibited a fairly consistent track with the broader gold stock index over time.
What is sparking my interest is the recent divergence in the price trend of the GDX versus the relative price of GLD to RGLD.
The GDX and the GLD relative to RGLD have moved, more or less, in tandem up until late 2011 and early 2012. In my mind, this indicates that investors were anticipating a moderation in gold prices, as the absolute price trend of RGLD tracked down through April 2012. Since April 2012, the price of RGLD has risen from just below $60 to jut below $100. However on a relative basis, gold has outpaced the increase in RGLD, as the relative price path of the GLD to RGLD has not broken the downtrend. Either this represents a great opportunity to buy RGLD or it suggests that traders still have trepidation towards the overall sustainability of the recent rise in gold prices. My vote is on the later. In previous posts, I stated my opinion on why I think the GLD will pullback into mid $160 range. In addition, I think high volume selling of RGLD suggests a broader consolidation not only in gold, but gold stocks. I would also note that a pullback was telegraphed in the timing model in past weeks. However, the alleviation of extreme levels on the timing model may indicate a more shallow retracement versus a complete reversal.
This post is partially prompted by yesterday's volume off the high list, which included RGLD. As a brief review, RGLD is one of the best operators and most leveraged (to the price of gold that is) companies in the gold space. The company essentially acts as a broker for gold production of mining operations, contractually taking gold from miners at lower prices and selling into the market at higher prices. RGLD operates an asset-light business model, and in fact only has 19 employees. This asset-light business model means the company's- by not having the same fixed cost operating leverage of traditional gold miners, disproportionately benefit from rising gold prices, relative to gold miners. Due to this business model, RGLD's stock will tend to move inline with gold prices or the anticipated future path of gold prices.
I track this relationship over time, and I provide two charts showing this below. The first shows the price of the Gold Spider ETF (ticker GLD) relative to RGLD and the Market Vectors Gold Miners Index (ticker GDX). The second shows the same two price charts, but on a rolling six-month change. You will see that the price of the GLD relative to RGLD has exhibited a fairly consistent track with the broader gold stock index over time.
What is sparking my interest is the recent divergence in the price trend of the GDX versus the relative price of GLD to RGLD.
The GDX and the GLD relative to RGLD have moved, more or less, in tandem up until late 2011 and early 2012. In my mind, this indicates that investors were anticipating a moderation in gold prices, as the absolute price trend of RGLD tracked down through April 2012. Since April 2012, the price of RGLD has risen from just below $60 to jut below $100. However on a relative basis, gold has outpaced the increase in RGLD, as the relative price path of the GLD to RGLD has not broken the downtrend. Either this represents a great opportunity to buy RGLD or it suggests that traders still have trepidation towards the overall sustainability of the recent rise in gold prices. My vote is on the later. In previous posts, I stated my opinion on why I think the GLD will pullback into mid $160 range. In addition, I think high volume selling of RGLD suggests a broader consolidation not only in gold, but gold stocks. I would also note that a pullback was telegraphed in the timing model in past weeks. However, the alleviation of extreme levels on the timing model may indicate a more shallow retracement versus a complete reversal.
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