Category Archives: gold

Dow Theory on Gold

Dow Theory attempts to define and identify major moves in markets referenced here as the “primary trend.”  In this piece, we will outline the price of gold according to Dow Theory.

We’re going to review and analyze the primary trend that extends from the September 2011 peak to the currently established low in the price of gold in December 2015.  We believe that this information is critical to understanding where we are and where we might be going.  This interpretation is based on the work of Charles H. Dow, co-founder of the Wall Street Journal and namesake to the longest continuous stock market indexes. 

Keep in mind that all of the analysis that follows is done in generalities so that an individual who is curious about Dow Theory can refer to the technical manual on the topic titled The Dow Theory by Robert Rhea.  However, the true heart of Dow’s theory is found in his original writing which covered the topic of earnings, dividends, effect of dilution of shares and economic outlook AND NOT lines on a chart.  Two books that cover Charles H. Dow’s work as a fundamental analyst and an adept economist are titled Dow Theory: Unplugged and Charles H. Dow: Economist, respectively.

Lines on a Chart

Dow Theory has been synthesized down to a level of lines on a chart, which isn’t all bad.  The lines still reflect fundamental economics.  The challenge is the accurate interpretation of what is implied by the meaning of those lines.

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Gold Stock Indicator: May 2017

Gold and gold stocks have been treading water since January 2017.  While a trading range has been established, there are ominous signs on the horizon.

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Are There “Values” in Gold Stocks?

Looking at any analysis of gold stocks, you would think that fundamentals matter.  The companies have quarterly reports that reflect operating expenses, pre-tax profits, estimates reserves, sometimes earnings and in rare instances dividends. 

However, when it comes to gold stocks, the only thing that matters is the direction in the price of gold.  If you believe you know the direction of gold then, by default, you know the direction that gold stocks are headed.  All semblance of fundamental analysis is ultimately not relevant to the price of a gold stock, in spite of proven & probable reserves, acquisitions, share buybacks, AISC or claims by the CEO that things are looking up (they rarely, if ever, say the opposite).

Take a look at a comparison between gold and the price of Barrick Gold Corp. (ABX) in the period from October 2003 to April 2017.

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The only distinction to be made between the price of the stock and the price of gold is the magnitude of the direction up or down.  If fundamental investing mattered, then at some point there should be some level of divergence in the general direction of gold and gold stocks.  This would allow savvy investors to seize on the mispricing of a stock and ride the wave up or down.

For the sake of comparison, look at the difference between corn and Archer Daniels Midland (ADM) over the same period as the ABX and gold review.

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In the case of ADM, we can see the areas (blue boxes) where there are distinct divergences between the price of the stock and the price of corn.  These are key areas where fundamental values, and basic economics, demonstrate key levels of under/overvaluation.  Of course, ADM is not simply a pure play on corn as they’re involved in other agricultural products.  However, knowing the industry, pricing, competition and other attributes of the business could give you a distinct advantage as a buyer and seller of ADM stock.  This is not the case for gold stocks.

Lest we be called out for being selective in choosing a period that was only in a rising trend, we have included the period from 1983 to 2001 and compared the Philadelphia Gold and Silver Stock Index (XAU) to the price of gold, a time when gold was in a declining trend.  In this more expansive period of time, there was only one point in time, January 1986 to July 1986, when there was a material divergence between the price of gold and gold stocks.

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It is precisely when there is a material divergence between gold and gold stocks that a fundamental review will reveal the true “value” and therefore warrant contrarian investments (short/long) in the gold stock complex.  If a period of divergence isn’t as readily identifiable, as in the ADM example, then you know that what should be examined isn’t the stock but the underlying commodity.

Ultimately, when a well known stock analyst ( or unknown) applies fundamental analysis to a gold stock, you know that you are reading material that is of little or no value in relation to reality.

Gold SRL

On June 5, 2016, we said the following of gold:

“Upside resistance is at the ascending $1,055.42 level.  the current downside move looks to retest the previous move to the ascending $843.32 level.”

Breaking this down, we note where gold was at on June 5, 2016 on the accompanying chart.  At the time, gold had come off of a +17% spike in price from the December 17, 2015 low.  A run up to the ascending $1,055.42 level would have brought gold as high as $1,400.  The best that gold could do on the upside was $1,366.25 before falling back down to the ascending $843.32 level.

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Where to Now?

The Definitive Dow Theory on Gold

Dow Theory attempts to define and identify major moves in markets referenced here as the “primary trend.”  In this piece, we will outline the price of gold according to Dow Theory.

We’re going to review and analyze the primary trend that extends from the September 2011 peak to the currently established low in the price of gold in December 2015.  We believe that this information is critical to understanding where we are and where we might be going.  This interpretation is based on the work of Charles H. Dow, co-founder of the Wall Street Journal and namesake to the longest continuous stock market indexes. 

Keep in mind that all of the analysis that follows is done in generalities so that an individual who is curious about Dow Theory can refer to the technical manual on the topic titled The Dow Theory by Robert Rhea.  However, the true heart of Dow’s theory is found in his original writing which covered the topic of earnings, dividends, effect of dilution of shares and economic outlook AND NOT lines on a chart.  Two books that cover Charles H. Dow’s work as a fundamental analyst and an adept economist are titled Dow Theory: Unplugged and Charles H. Dow: Economist, respectively.

A Look Back

It is necessary to outline the history of primary trends in the price of gold to ensure clarity of where we are coming from and where we might be now.  Below is a graph of the price history of gold with the primary trends.

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The dates for the primary trend indication are as follows:

  • December 1969 at $35.17
  • December 1974 at $188.25
  • August 1976 at $104.20
  • January 1980 at $760
  • August 1999 at $255.35
  • September 2011 at $1,895
  • December 2015 at $1,049.40

The percentage change for the primary trend indications above are as follows:

  • I: +435%
  • II: -45%
  • III: +629%
  • IV: -66%
  • V: +642%
  • VI: -45%

Dow Theory Primary Trend Analysis at VI