Let's waste no time. Take a look at this chart...
The black line is the Market Vectors Gold Miners (NYSE: GDX), an exchange-traded fund (ETF) that holds shares of major gold miners such as Barrick Gold (NYSE: ABX), Newmont Mining (NYSE: NEM) and Goldcorp (NYSE: GG). The red line is the SPDR Gold Trust ETF (NYSE: GLD), which holds physical gold bullion and is meant to track the price of gold..
One year ago, GDX was much higher in price relative to its current value, while GLD was lower. In fact, GLD is modestly up, compared to a year ago, by about 6%. GDX is down some 25% during the same time period.
What are we to infer from this data? Well, it's one of two things: either GLD (meaning gold) is overvalued, or the miners (GDX) are lagging the price of bullion and are destined to return to some form of parity with the metal of all metals.
Before I pontificate further, let's look at another chart...
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This is a far more striking visual. Here we again have GLD's performance during the past year, but this time compared with the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ), which holds shares of smaller gold miners. While GLD is up 6% during the past year, the juniors (GDXJ) are down a whopping 40%.
If you have traded these securities during the past few years, then you have to be impressed. But as much as some may want to quibble with my opinion, I do not think the story has changed much for gold. That's why I think GDX and GDXJ are undervalued -- and likely to catch back up to gold quite soon.
Gold prices will not go back to $250 per ounce. I don't think they will fall back to $1,000 per ounce again, either. I will be amazed if gold even manages to drift below $1500.00 per ounce.
Why, you might ask?
I call this my theory of finite wealth.
If you've ever read about the theory of finite energy, then you know the idea is that there is only so much energy to go around. The idea is that if a whole bunch of energy is expended in the summer, let's say during hurricane season, for example, then there will be less energy available in the winter (and moisture) to produce snow.
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With paper money, that fictional entry in the U.S.A.'s massive computer system, there is the same effect. You can't create wealth, you can only create currency. The more you create, the less it is worth. The value of the money will, in terms of buying power, continue to decline. Real wealth cannot be created that way. The beneficiary of such money manufacturing is real assets. And despite what the naysayers believe, gold is the perfect arbiter of value.