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The rally in precious metals since November of last year has been nothing short of exhilarating for investors after a frustrating multi-month stretch of range-bound price action. Increased inflation expectations, the Fed signaling that bonds won’t provide much yield anytime soon, and the deflating of 2018’s dollar bubble have all provided gold bugs with a substantial boost of encouragement.

Another bullish factor includes fund buying of gold, with long gold positions in ETF’s rising to a nearly six-year high as global geopolitical concerns and persistent fears of an economic slowdown continue to fuel demand for gold as a store of wealth.

2019’s massive rally in the S&P 500, which recently reached a 2-and-a-half-month high, would normally be expected to reduce the safe-haven demand for precious metals – and yet, gold has marched forward in tandem with the stock market, signifying investor caution even amidst the blue-chip relief rally:

Gold price vs. U.S. dollar. Courtesy: barchart.com

On a technical level, it’s clear that gold has broken through January’s $1,300 resistance level with force and at almost a vertical angle in mid-February. High volume has confirmed the conviction of gold’s breakout, and at the current trajectory, it might not be long before gold is knocking on $1,400’s door.

Turning to the gold mining sector, we’ll observe that although the miners have benefited from gold’s breakout since November, there’s a lag in the price action as the miners haven’t yet caught up with gold:

Gold ETF in yellow; miners ETF in brown. Courtesy: tradingview.com

Since the miners tend to move faster than the metal, it’s unusual to see the gold miners lag this much behind gold, even if gold’s move is the catalyst here. Given the magnified moves in the mining sector, we would typically expect the miners to at least keep up with gold, if not outperform it.

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The question then becomes: why are the miners lagging behind the metal? First of all, let me clarify that not all gold miners are lagging behind gold: it’s merely an observation about the sector overall. Still, it’s a valid question that ought to be addressed (and I’m certainly not going to sit around and wait for the corporate media to address it).

One likely factor is investor psychology: mining stock investors tend to be more sophisticated, and therefore more cynical, than your Average Joe or Average Jane blue-chip stock investor. And with cynicism comes reluctance to buy into the gold rally: miner traders have seen plenty of head-fakes and are awaiting confirmation of the gold rally before taking a long position in the mining shares.

I believe this to be a plausible explanation, and quite bullish because once the miner traders are convinced that gold’s rally is genuine, the price action in gold mining stocks should be explosive. For investors who missed the run-up in gold since November, you’re basically getting a second chance to invest – with serious leverage – by picking up shares of carefully selected gold miners.

Courtesy: miningreview.com

This speaks to the art of capitalizing on sector divergences: when there’s a lag between two connected market sectors, savvy investors will conduct their due diligence to determine which of the two sectors is “telling the truth” in anticipation of the laggard sector catching up with the leading sector.

Another example of this would be gold and silver, since those two metals tend to move together over the long term but sometimes we’ll observe short-term price divergences. I’m monitoring the gold-silver ratio closely, and it’s at around 83-to-1 currently, indicating that silver is likely to catch up to gold at some point.

And that’s how I’m viewing the gold miners right now: they’re likely to catch up to gold, and it could happen sooner than most people expect it to. Keep your eyes on Crush the Street for frequent updates on this story and opportunities in the mining sector that can help you profit from this unusual market divergence.

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