The stock market in general is considered to be forward looking, in other words the prices are based on future expectations not on present reality. That’s why the best time to buy stocks is usually when things look the worst, like March 2009 for example. Stock market turns generally lead turns in the economy by about 6 months.

Precious metals stocks are no different. Quite often you will find that the gold and silver stocks will begin making a move ahead of the actual movement in the metal. This is called divergence and it may be just a couple days or it may last for several weeks or longer.

Since the beginning of the gold rally in August the Gold Stocks had been outperforming the actual price of gold as you can see by the chart below.

Even when gold made a slight new high in early December, the Gold Stock ETF – GDX made a significant new high meaning that investor conviction remained strong. However you can see that sentiment began to change over the coming month. As the gold etf – GLD retested the highs for the 3rd time you can see that GDX (the gold stocks) made a much lower high. This was the indicator that investors were taking profits in anticipation of weakness in gold.

GDX - Gold Stocks ETF Compared To GLD - Gold ETF

As we came into the new year the underperformance of the GDX accelerated and this lead to declines in both silver and gold.
Underperformance of GDX Accelerated In 2011

By no means is this always the case, but when you do notice that the Gold Stocks begin to outperform or underperform the actual metal it is simply a cue to start watching for a change of trend in the actual metals.