Ignore gold’s trend at your own peril

November 28, 20138 Comments

It seems to me that there are two types of gold investors. One type- who I would classify myself under, look at gold as just another security. We’re pragmatic investors. That is—we will consider it if the technical trend is up, and we will trade accordingly. We’re not in love with gold, nor are we fixated on any security for that matter. It’s just another security in the vast universe of positions that can be considered for a trade, should our filters determine it’s a fair bet to do so.

The other type of gold investor is more of a thematic one. I am not in the thematic gold investor camp. Thematic gold investors believe in some type of thesis suggesting that gold must go up, no matter what its doing now. If its not going up, its a conspiracy. For example, some thematic gold investors suggest that someday the world will return to the gold standard. They believe that it’s a hedge  (in their minds) against the inevitable collapse of the U.S. dollar, lead by the rampant inflation that must come from the Fed’s money-printing. Thematic investors tend to overweight gold in their portfolios for these reasons, or others. Some thematic investors hold gold as something one should hold for the long term as part of a widely diversified portfolio. Perhaps that argument may be a reasonable compromise for thematic gold investors to consider.

Rather than enter into a philosophical discussion about gold and the perils of the US debt situation, let’s take a look at the gold charts.

Our first chart is stockcharts.com’s 40+ year comparison of gold vs. the U.S. stock market, as represented by the DJIA. One can see that gold was a pretty lousy place to be during the 1980- 1999 stock market bull market. Gold fell from about $800/oz. to about $300/oz. (a loss of about 2/3rds its value) during the time that the Dow climbed from 900 to almost 12,000 (a 13-fold gain).

gold long

But notice what happened when the sideways consolidation began  for the U.S. stock market in 1999. While the Dow failed to hold above 12,000-ish for the next 12 years (0% return), gold surged from a low of about $250/oz. to a 2011 high of $1900 (750% gain). Gold was obviously a great hedge –and a fantastic security to hold during that period of low returns on stocks. Gold acted as a negatively correlated asset to stocks during this period.

It would appear that the party for gold has ended, now that the stock market party has begun. After its peak in 2011, the trend has been decidedly down for this commodity. Meanwhile, the U.S. stock market has recently broken out of a multi-year consolidation pattern. A new bull market has emerged for stocks (interim corrections aside). It would appear that gold is, once again, acting as a negatively correlated asset to stock prices. The short termed chart, below, paints a clear picture of this trend. Lower highs, lower lows, and a price that trades below the 50 and 200 day MA’s –which are also pointing down. Gold is currently down about 34% from its highs.

gold

Thematic investors may be waiting for the “Great inflationary collapse of the U.S. dollar”. From a practical point of view, they’ve lost 34% of their money since 2011 by sticking to this story. I’ll join them when gold stops making lower lows, consolidates, and breaks out to the upside. I will not buy gold, or anything else for that matter, based on a theory or theme. Perhaps gold will reverse its trend and begin rising when the stock market party ends. Meanwhile, I prefer to invest with the trend in mind – meaning that I am avoiding gold.

 

8 Comments

  • – Using a trend line starting in 2001 gold is now approaching it’s long term trend line, since 2001 the DJIA is approaching overhead resistance and is appearing to complete a massive megaphone top.

    The stock market party has begun? consolidation pattern are you referring to? Your flat line break out is probably a fake out.

    The DJIA could be completing a 3 peaks and a domed house
    http://www.mcoscillator.com/data/charts/weekly/1929analog.gif
    https://lh3.ggpht.com/-FLbJ7tX6Lh0/UKUybXdr-6I/AAAAAAAAC5g/2ti8pSTgLqo/s1600/120927+3PDH+schematic.jpg

    and a Sornette Bubble
    https://d21uq3hx4esec9.cloudfront.net/uploads/newsletters/Image_9_20131127_OTB.gif

    Reply
  • I completely agree. Thanks for the informative post.

    Does the same view of the price of gold apply to the GDX as well? I find that oftentimes there is a disconnect between miners and gold. I would imagine that GDX is highly correlated to GLD over the long term however plotting a 7-year chart of GLD:GDX in stockcharts hardly shows a stable, consistent relationship.

    Reply
    • Chris–looking at the GDX chart (or the XGD chart on TSX)–there has certainly been strong positive correlation between the price of gold and the price of the producers since gold’s peak in 2011. I’d have to go with that relationship for now–the trend for both is awful.

      Reply
  • Could I get your technical assessment of Natural Gas please?
    RSI is nearing 70, however there are many examples of gas or other stocks hitting 70 and the stock still rising for some time, even a month more.

    Full Stoh is at 95 but again it can sit there for awhile as the stock still appreciates.

    MACD has risend, but not extremly high. It has not crossed over.

    Still in seasonal strong period till Dec 21, so a few more weeks to go.

    The trend continues to rise, and I think you say the trend is your friend.

    Volume has decreased the last few days but perhaps that is US Thanksgiving.

    So can you see this still running for say another couple of weeks, maybe with a small blip down, but in 2 wks would you predict it being higher then it is now?

    Thanks

    Reply
    • Hey Daddyo
      I was looking at Nat Gas over the weekend. Its got some pretty significant overhead resistance at $4.50, then $5-ish. I’d hate to give a short termed call, but if you put a gun to my head, I’d say, yes, perhaps a bit more upside, but I’d be very cautious given the seasonals ending, the resistance, and the near-overbought momentum indicators. Keep your finger on the trigger.

      Reply
  • Hi Keith, aren t you concerned by the weighting of commodity stocks in XCS.TO? Thanks.

    Reply
    • Hi Mark
      Yes, we tore the index apart, and that was a concern. However, small cap miners and energy stocks can perform differently than their large-cap cousins. Also–the weighting of the industrial/tech etc stocks in the index was still reasonable. I have a 5% position in the index–its a play for the winter.

      Reply

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