Gold Stocks Compared To Gold The Commodity

Gold was up again today. The April contract was up $5 and Silver was up 15.50 for the March contract.

If you look at the above long term monthly chart of the XAU Index you'll notice that we are at the top of the range for the past 20 years. Some people might consider this resistance or overbought and look to get out of gold stocks but I take the opposite view.

In the lower panel is a ratio line of Gold Stocks compared to Gold futures. Notice the extremes in this ratio line. I marked off the levels which I consider undervalued and overvalued. When this ratio gets below the lower line, this would be a good time to start accumulating gold stocks. When the ratio gets above the upper line, this usually coincided with market tops and gold stocks would sell off.

Right now the XAU is at the top of the 20 year range, but the ratio line is actually very low and undervalued when compared to gold. In the past when the XAU got to this level the ratio line was very high and the XAU would sell off. But this time the ratio is low which tells me that gold stocks will most likely break much higher in the coming months.