Friday, March 17, 2017

After The FED Meeting

So, interest rates are up. This time the FED did what a majority of investors were expecting. Interestingly, contrary to popular wisdom, gold prices went up as well.

What is even more interesting, although FED rates went up, market interest rates went down (for example, 10-Year Treasury yield went down from 2.6% to 2.5% on the announcement day). I am not surprised - the general rule is as follows:

before an event the financial markets try to adjust to this event; after the event the markets go in the opposite direction, at least for some time 

Now we are in this second stage of market reaction, which can take some time. Anyway, gold bugs regained some optimism. For example, this week the SPDR Gold Trust (GLD) reported a high inflow of gold into its vaults (380.9 thousand ounces until yesterday).

What is more, share prices of gold / silver miners also reacted very positively on higher interest rates. For example, the Market Vectors Junior Gold Miners ETF (GDXJ) went up 11.5% on the FED announcement day.

However, in this post I would like to look at precious metals miners in the long - term. Let me show this chart:

The chart shows the well-known ratio of GDXJ / GDX (GDX stands for the Market Vectors Gold Miners ETF). As a rule, when this ratio goes up it means that:

  • we have a full-blown bull market in gold / silver
  • there is an initial phase of a bull market in gold / silver and investors may consider investing in precious metals shares

When the opposite happens (the ratio goes down):
  • there is a bear market in gold /silver
  • investors have to be very cautious about investing in precious metals shares (a bull market is close to its end).  
For example, the blue arrow indicates an initial stage of a bull market in the precious metals market. This phase started in March 2015, when everybody was pessimistic about gold / silver. However, in March 2015 the ratio GDXJ / GDX had started its upward trend. It was an early signal for gold bulls that, after a four-year correction in gold prices, they should have considered investing in the precious metals sector again.

Last but not least - the GDXJ / GDX ratio still supports a bullish thesis on gold...

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