Category Archives: gold

The gold market is off and running.  There are many reasons for the current rise in the price of gold but it is all after the fact and may only be guessing at best.  It is important to note that “Brexit” has occurred six months from the respective lows in gold and gold precious metal stocks with each rising as much as 28% and 165%, respectively.  To our minds, giving credit to the turmoil in the UK for the increase of precious metals is somewhat misplaced and could lead to more wrong conclusions than a single “right” one.

All that we’re considering is the price action and that alone is giving us food for thought. Below is the performance for gold and gold stocks from April 1, 2016 to July 1, 2016.

Since our posting on June 5, 2016, the price of gold has increased by +8.02% and the gold stock index has increased by +15.09%.

If you like a rising market then you definitely want the price of gold and gold stocks to increase above the level of $1,294 and 92.85, respectively.  Otherwise, there will be a big blowoff in the gold market and sizable downside risk.

Good News, Bad News

Since our March 2016 posting, the price of gold has decreased by –5.00% while the Philadelphia Gold and Silver Stock Index (XAU) has increased +4.45%.

Since our February 12, 2016 posting, the price of gold has increased by +3.04% while the Philadelphia Gold and Silver Stock Index has increased +10.07%. 

There is the mistaken view that in order to verify the trend in the precious metals market based on Dow’s Theory, investors should compare the price of gold with the price of silver.  In fact, this is incorrect.

Gold and gold stocks have made a turnaround in the declining trend that has persisted over the last several years.  The reactions to a dramatic rise or fall in commodity prices is usually equal in violence and magnitude.  Gold has increased +15.59% while gold stock has increased +27.90% since our last posting.

There is a lot of excitement in the gold investing community as there is the belief that this may be the long awaited bull market in gold which has been attributed by some by the advent of negative interest rate policies in major economies like Japan.  We remain hesitant to believe that all is well in the gold sector as this is the third year in a row that gold has started strong.  The last two years (2014 & 2015) both ended in the loss column for the year, in spite of the early gains.

The above chart shows exactly how gold garnered early gains.  For 2014, gold ended the year at a loss of –1.55% while the XAU index declined –21.11%.  For 2015, gold fell –9.55% and gold stocks fell –35.89%.  The early gains for 2016 are nice but new investors should accept what may come if there is a repeat of the last two years.

Gold and gold stocks continue to struggle in an effort to remain in a trading range rather than collapse.  A fall is coming if we see the general equity markets decline, which would compound the abysmal performance of the precious metal stocks over the last five years.

Gold Stock Indicator

Since our last posting, gold has slumped an additional –5.44% while gold stocks have declined –17.90%.

It was a tale of two markets with the price of gold increasing less than 1% while gold stocks increased +11.87%.

Since August 13, 2015, the price of gold has increased by +2.15% while the Philadelphia Gold and Silver Stock Index has declined –2.13%.

The price of gold could be considered to be on a tear given the fact that it isn’t falling, at the moment.

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Since June 29, 2015, the price of gold has declined –3.67% while the gold and silver stock index (XAU) declined -15.19%.

The recent declines are nothing compared to the full extent of the carnage that has been witnessed since the 2010 peak in gold stocks which have fallen –76%.  Meanwhile, the price of gold from the 2011 peak has declined -40.22%.

This decline is very much similar to the percentage declines experienced in the period from 1974 to 1976 when gold fell –44% and gold stocks fell –68%.

The following two quotes from Richard Russell (near the low in the gold market) seem appropriate given the current market conditions:

“The great fortunes have been made in the market by buying shares that no one wanted. S. African golds are nearing that point now. For those willing to "buy'em and put'em away," for those willing to write off a possible loss against a possible major gain, many of the marginal S. African gold shares are interesting now (Russell, Richard. Dow Theory Letters. April 2, 1976. page 6.).”

“In August of 1975 the golds fell out of the triangle and entered into one of the worst bear market collapses I have ever seen. By mid-1976 about 75% of all gold mine values were wiped out. Guessing at bear market bottoms for stock groups is always a hazardous occupation. Certainly, the action of the last month must be considered a panic in gold shares.  Bear markets often end with downside panic action. Therefore, in view of the time element of the bear market, the severity of the recent chaotic panic action, and the current gold pessimism, I am guessing that we will see the lows for most gold shares in this area. But I would say that holding gold shares is an uninteresting proposition unless relative strength for the group turns bullish. It hasn’t yet (Russell, Richard. Dow Theory Letters. July 30, 1976. page 5.).”

Since our last Gold Stock Indicator posting, the price of gold has increased <1% while the Philadelphia Gold and Silver Stock Index (XAU) declined –4.49%.

Below are is the GSI for Barron’s Gold Mining Index from 1973 and XAU Index from 1983.  Based on these two charts, an investors can easily discern where we are from a valuation perspective.

Gold fell hard this past week.  On the week, gold declined –2.25% while the gold stock index dropped –2.84%.

Although gold stocks fell more on a percentage basis, from a historical standpoint the metal declined by a greater magnitude as reflected in the Gold Stock Indicator below.

Gold and gold stocks traded places in the last month with gold increasing from 1175.95 to 1191.40 while the gold stock index (Philadelphia Gold and Silver Stock Index) declined from 73.12 to 69.7o.  However dramatic the changes appear in the chart below, the actual change was +1.31% for gold and –4.67% for gold stocks.

The narrow range in the price of gold and gold stocks seems to indicate that there is a measure of price stability at the current levels.  Naturally, that all changes when new lows are achieved.  However, from June 2013 to the present, we have seen what could be called a basing in the price of gold and gold stocks.  This is difficult to perceive especially when we know that the stocks and metals have been much lower in the past.  Looking at the long-term Gold Stock Indicator puts into perspective where we are today.