Time to Mine for Profits

 | Oct 12, 2011 | 1:00 PM EDT
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One of the interesting oddities this year in equities has been the disconnect between SPDR Gold Shares (GLD), the ETF that tracks gold, and junior gold miners.

GLD is still up 17% for the year, while the S&P 500 is down 5% for the same period. U.S. Gold (UXG), however, has lost half of its equity value year to date -- a far cry from its 2010 performance when it was up 175%.

UXG is a relatively small play with a $500 million market cap. But it has a good pedigree. Its CEO is Rob McEwen who founded Goldcorp (GG), which now has a $40 billion market cap.

NovaGold Resources (NG) is a much larger, junior miner with a $1.7 billion valuation. It was "discovered" last year by John Paulson and became a mini-darling on Wall Street with many other copy-cat hedge funds piling on. The stock, like U.S. Gold, was up 177% in 2010. This year, it's down 50%.

David Rosenberg, one of the biggest market bears on equities who also has been a big gold fan for a long time, has noticed this discrepancy between the two types of gold exposure. He has been advising his clients, at least for the last month, to get into the junior miners.

This has been a busted trade for the last month. During that time, the S&P 500 is up 3.6%, but U.S. Gold is down 34% and NovaGold is down 22%.

That's oversold.

Indeed, the last five trading sessions have been much different. U.S. Gold has climbed 16%, NovaGold is up 13%, but GLD is only up 2.8%. The miners are continuing to go up today.

On a short-term basis, look at getting back into these stocks for a short-term bounce to close the big underperformance gap.

However, be careful longer term, (i.e., beyond the next two to three  weeks). I'm still short to neutral in my GLD position for the next few weeks, which means I'm not expecting much upside from here in the ETF. However, the gold miners are still way oversold here.


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