Gold Stocks Vastly Outperform Gold On The Week – Will The Trend Continue?

For the week ending October 14, gold continued to rally, gaining $26 on the week to $1,678.00 as measured by the closing London PM Fix Price.

Gold stocks, by comparison,  dramatically outperformed the gain in bullion by almost fourfold.  In order to get a broad based assessment of relative performance, gold was compared to the XAU, GDXJ and TGLDX.

The XAU or Philadelphia Gold/Silver Sector is a broad based index of sixteen large precious metal mining companies, the GDXJ or Market Vectors Junior Gold Miners tracks small and medium cap gold and silver miners and the TGLDX  or Tocqueville Gold Fund is a diversified gold stock fund with one of the best track records in the industry.

A summary of gold compared to the XAU, GDXJ and TGLDX for the one week period ending October 14th is shown below.

One week does not ensure that a trend will continue but the gold stocks have long been under priced in relationship to gold bullion. Eventually, this pricing disparity will converge. Throughout 2011, gold stocks underperformed gold as can be seen by comparing the performance of gold to the XAU.

XAU VS GOLD - courtesy stockcharts.com

The Tocqueville Gold Fund (TGLDX), run by legendary gold investor John Hathaway, has vastly outperformed the S&P, the XAU and gold bullion over the past decade with an average annual return of over 26%.  This is what John Hathaway had to say about the long term performance of gold stocks in his first half investment update for the Gold Fund.

During the 1st half of 2011, gold shares lagged the gold price. Bullion rose 5.56% while the XAU benchmark declined 10.57%. The Tocqueville Gold Fund declined 5.53%. This apparent disconnect is not unprecedented. For example, during the credit crisis of 2008, the XAU declined 28.54% while the price of gold rose 5.77%. Even though the gold price is the single most important fundamental determining value for gold mining shares, they often do not move in lockstep and the first half of 2011 is one such example. In 2010, gold shares performed particularly well and the XAU rose 34.67% while the metal rose 29.52%. In our opinion, the relative underperformance of gold shares during the first six months of this year represented a healthy and necessary consolidation. The Tocqueville Gold Fund owns physical bullion but is much more heavily weighted to gold mining stocks, as has been the case over the past ten years.
We believe that there is significant performance catch up potential ahead for gold mining shares relative to bullion. Earnings reports for the quarter just completed should be exceptionally strong for all producers and in most cases surpass all- time records. We expect such results to be accompanied by numerous announcements of dividend hikes. Should gold prices maintain or exceed the $1500 level, skeptical investors will become more willing to normalize the earnings power that is soon to be demonstrated.
The factors that drive liquid assets into gold bullion continue to flourish. Most important, negative real interest rates open the floodgates for capital to seek out the safety of gold. In addition, the never ending sagas of the Eurozone debt woes and the US debt ceiling remind investors that sovereign debt of nearly all Western democracies are not the safe havens they were once regarded. Nevertheless, while we expect bullion prices to set new highs during the second half, we believe gold mining shares will provide returns superior to the metal.

The latest report on the top ten holdings of the Tocqueville Gold Fund are shown below.

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