Montreal, Canada

Investors who purchase distressed gold stocks at these bombed-out levels might earn big double or triple-digit gains over the next 12-18 months, according to the gold-to-XAU ratio below.

The performance differential between physical gold and the gold mining shares hasn’t been this out of whack since early 2009.

If an investor purchased gold stocks in the first quarter of 2009 when the financial system was still reeling he would have earned more than 130% twelve months later. A similar trajectory to future profits now lies in the same matrix following a massive drubbing since the first week of May.

The gold-to-XAU ratio (see below) divides the price of gold bullion by the Philadelphia Gold & Silver Index (XAU) of large-cap mining stocks. The ratio closed at 7.91 on Friday – the highest since early 2009.

According to research courtesy of Dr. John Hussman (The Hussman Funds), previous declines in gold stocks compared to gold bullion have resulted in huge gains for mining shares. Since 1974, the gold-to-XAU ratio has been greater than 5.0 about 15% of the time, according to Dr. Hussman; when this ratio has been this high (currently even higher at 7.91), the XAU Index has thereafter posted annualized gains of 89.6% on average.

To be sure, there’s no guarantee that gold stocks will rally 90% or more over the next year. The dollar is finally catching a bid at these levels as “risk-off” comes back into play once more. And gold might follow silver and other commodities into the tank this summer before bottoming. But considering the huge values in gold mining stocks relative to the metal and the absolute bearish sentiment now pervading across the space, I’d bet Hussman is right; gold stocks are a superb bet over the next year or so at these values. And the dollar won’t be supported by higher Fed rates for a long time amid a fractured jobs market and a depression in housing. The dollar rally is a rally to sell.