Sunday, August 28, 2016

How To Play This Bull Market In Gold In A Disciplined Way, Revisited

In a post titled "How To Play This Bull Market In Gold In A Disciplined Way" I presented a chart showing the relationship between the broad precious metals stock market (represented by XAU) and gold. Then I put a thesis that as far as XAU is stronger than gold, precious metals investors should not worry about their PM portfolios because such a relationship is indicative of a healthy bull market. 

Yesterday one of my readers spotted that now the broad precious metals market is weaker than gold. The chart below shows this situation:

Well, the question is: "Is the upper panel of the chart showing an upward or a downward trend?".

Let me answer that question as follows:

The facts are that:
  • surely, the trend line has been broken
  • surely, since middle August precious metals stocks have been weaker than gold
Now, I do not think it would be a well supported thesis that now XAU is trending down against gold. Why? According to Investopedia:

"A formal downtrend occurs when each successive peak and trough is lower than the ones found earlier in the trend"
I am sure that what we see now is not a downward trend as defined above.

However, who knows, financial markets are unpredictable and the current upward trend may develop into a downward one. That is why it is so hard to make money in financial markets. However, now it is too early to pronounce the end of the current trend. 

I hope this explanation helps...

A final note - the long-term view on XAU / Gold relationship (once again):

In late June 2011 investors had got an important signal - XAU / Gold relationship entered its downward trend. The chart above shows lower highs and lower lows established by a multiple XAU / Gold. The blue, vertical line shows the point in time when the signal was clear. Note that PM stocks investors still had time to sell their stocks (XAU was trading in a range until early 2012 - the area marked in yellow).

Now we are still at the beginning of the entire cycle but it cannot be ruled out that PM stocks had just entered a period of comparable-to-gold performance.

Unfortunately, the most important rerlationship between gold stocks and gold itsel is this:

"In the long-term gold is the winner".

Here is the saddest (for gold bulls) chart:


  1. Thanks for all your articles. It would be helpful if you showed a longer term chart. One that included the last bear market in gold stocks. How does this short term break below trend compare to other ones?

  2. When you say gold stocks, do you mean gold miners or ...? How should one invest purely in gold then, gold futures?

  3. Yes, precious metals miners (gold and silver producers)

  4. Still a little confused. In your SA post today you talked about gold stocks out pacing gold for only short periods of time. As you noted gold stocks have been doing that for 6 months and 8 months is the average. Is it time to bail out of gold stocks?

    1. Harry,
      Not at all. If everything was going in the same way as before we all would be very, very rich (because in that case financial markets would be totally predictable). The history repeats but this repetition is always a bit different.

      I believe that we are still in the first stage of the bull market in gold. It is way too early to call anything. Let the trend to continue.

  5. I'm still confused. What instruments should we invest in according to your opinion?

    For example if I believe gold will continue its bull run, should I invest in GDX? GLD? HUI? Or gold mining stocks like ABX, HL?

    On one hand you say gold is going up faster than gold stocks. I interpreted 'gold stocks' to mean gold miners, which means gold miners aren't going up as fast as the price of gold. So how do you invest purely in the price of gold?

    I think you are also using the XAU$GLD chart to indicate that silver and platinum aren't going to keep pace with gold either?

    1. Calydon,
      Historically, in the long-term gold is better investment than gold related stocks (gold miners). So, in the long-term it makes sense to put your money in gold. Writting gold I mean physical gold (bullion) or gold ETFs (ETFs, which hold physical gold in their vaults) as GLD, CEF etc.
      Gold futures are for speculators - if you are an experienced speculator you may try it (otherwise do not touch it).

      On the other hand, in the short-term sometimes it makes sense to put your money in gold miners stocks (ABX, NEM etc.) or in ETFs having exposure to gold miners (GDX, GDXJ etc.). However, such trades do not last long because, historically, sooner or later it is gold that is the winner.

      I hope it clarifies something.