Are Gold Stocks a “Risk-On” or “Insurance” Asset?

GOLD STOCKS NEWS – Gold stocks advanced on Monday, as the Market Vectors Gold Miners ETF (GDX) jumped by as much as $0.74, or 1.6%, to $46.67 per share in morning trading.  In doing so, the gold stocks ETF looked to post its largest single-day gain since November 19th.

Today’s rally in gold stocks represented a welcome respite for investors, as the sector has come under substantial selling pressure in recent weeks.  Since the end of October, the GDX has fallen 11.8% and is remains lower on a year-to-date basis by 9.3%.

Due in large part to the gold stocks sector’s weakness and its underperformance relative to the price of gold, several investors and analysts have taken a more bullish stance of late.  One noteworthy individual in this camp is Dr. John Hussman, founder of The Hussman Funds.  In his latest Weekly Market Comment, Hussman noted that his Strategic Total Return Fund raised its gold stocks exposure to 15% of assets.

“While many investors seem to believe that physical gold is somehow superior to the equities, this reflects a misunderstanding between spot markets and discounted values, in my view,” Hussman wrote. “Physical gold trades on the spot market, while gold shares are essentially a claim on the long-term stream of cash flows that a gold company is expected to achieve.”

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He went on to say that “If investors believe that an advance in gold prices is likely to be short-lived, gold shares may not advance proportionately. On that basis, my impression is that investors have really not bought into any long-term inflation concern, and are treating gold shares primarily as a ‘risk on’ asset instead of as an ‘insurance’ asset. Accordingly, the ratio of the spot gold price to the Philadelphia Gold Index (XAU) is presently near the historic high it reached during the credit crisis, and several gold shares presently have higher dividend yields than the S&P 500 itself – a remarkable change from historical norms.”

Hussman concluded by noting that “Though our allocation to precious metals shares remains moderate given the potential for investors to continue treating them as a ‘risk on’ asset, any shift toward expectations of durably elevated gold prices (even without higher levels than at present) seems likely to primarily benefit the shares rather than the metal.”