Gold Stock/Gold Correlation Becoming Unhinged

The correlation between gold stocks and the metal which they extract from the earth has been getting more unhinged recently and today reached an extreme with gold basically flat on the day while gold mining shares (GDX) were down 4.7%:

 

GDX (Daily) with gold price atop and rolling 20-day correlation between GDX and gold below

Gold_Correlations

Today’s drubbing in gold shares dropped the GDX to an all-time low and the HUI (NYSE/ARCA Gold Bugs Index) to its lowest levels since 2002. The selling was likely exacerbated by the break of the ~$13 support level and the continued weakness in the broader equity market (we saw yet another higher open quickly faded and the Russell 2000 close down 1.35% on the day). Investors also appear to be betting that the recent gold resilience will be short lived (in the face of weakness in other asset classes) and that we will see lower gold prices over the coming months.

This strong divergence between gold and gold mining shares is especially noteworthy because gold producers haven’t been this well¬†positioned to profit from a rising gold price environment in decades due to low energy prices, falling raw material costs, and weakness in the Canadian dollar and emerging market currencies. This means that it’s either one of the best times ever to load up on depressed gold stocks or we are about to see the next shoe drop in the precious metals space. Which one is it?…