The falling ratio between broader Gold Mining stock prices and the juniors is bullish for gold itself…

The PAST FEW WEEKS have been bullish for gold, in its bullion form, and also as an embed in mining stock prices, writes Brad Zigler at Hard Assets Investor.

We’ve touched on the different volatility of bullion and mining stocks before here at HAI, previously comparing Gold Bullion (or rather, the SPDR Gold Trust proxy) with the Market Vector Gold Miners ETF (NYSE Arca: GDX).

There’s more than one way to obtain broad exposure to the gold mining sector, though. Since its November 2009 launch, the Market Vectors Junior Gold Miners ETF (NYSE Arca: GDXJ) has outperformed GDX by a 3.5-to-1 margin, albeit with a dollop of extra volatility. Some of GDXJ’s components overlap into the GDX portfolio, but the newer fund weights smaller capitalization (read: development and exploration) companies more heavily than producers.

The excess variance can be seen readily when you plot the price ratio of the two ETF portfolios. The GDX/GDXJ ratio started life around 2.0 (that is, GDX’s price was roughly twice that of the nascent GDXJ fund’s), but has generally drifted lower since then.

I say “generally” because there have been significant gyrations along the ratio’s downward course. At times, the ratio sinks, meaning GDX’s senior producers lose value relative to the exploration companies. That’s when investors’ risk appetites sharpen.

At other times, when investors rein in their risk-taking, the ratio tends to rise in favor of GDX. Presently, the GDX multiple is 1.72 times – not its lowest value, but well off its most recent top at 1.92x. If the ratio breaks through the 1.72x level, a test of its old low at 1.69x is likely to follow.

But here’s the thing: A falling ratio means a bigger market appetite for risk. More specifically, a bigger appetite for Gold Mining stock risk. That, in turn, is an expression of investor confidence in bullion’s price strength.

So if you’re bullish on Gold Prices, then, you want the ratio between the broad gold-mining sector and the juniors miners to fall. Which it is doing.

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