In our most recent commentary we
wrote about the relative strength in the gold equities. Gold equities
have not only bucked the downtrend in the equity markets but in relative
terms are breaking to new highs against equity indices. In the chart below we
plot precious metals prices, GDX versus the Morgan Stanley World Index and
GDX versus the S&P 500. We highlight how each performed during bear
markets. Other than in the crash in 2008, precious metals and the equities
have performed quite well during times of struggle for conventional stocks.
For a historical perspective on the gold stocks relative to the stock
market, one should consider this chart from Nick Laird of Sharelynx.com. This picture shows the
ratio of the Barrons Gold Mining index versus the
S&P 500. Although a year old, the current ratio is fairly close to where
it was in 2010.
It is important to note that the strong outperformance of gold stocks
usually begins later in the bull market. During the 1923 to 1937 bull market,
gold stock relative performance surged from 1930 to 1935. In the 1960 to 1981
bull market, gold stock relative performance didn’t begin in earnest
until 1973. We are 11 years into the current bull market and the BGMI/S&P
ratio has yet to surge though it has increased gradually.
History tells us two things. First, it shows that when Gold is in a
bull market, the gold equities will outperform the stock market if its in a bear market. That was
the case from 2007-2009, 2000-2002, 1977-1980 and from 1929-1932. Second, it
shows that the biggest gains for gold stocks in both nominal and real terms
come in the second half of the bull market.
Precious metals and the related equities cannot have a strong bull
market lasting several years if conventional stocks are rising. If
conventional investments are rising then the
mainstream and retail investor won’t put one cent into Gold. After all,
if conventional assets are healthy then why do you need Gold? Gold flourishes
in an environment where stocks and bonds are questioned. The gold stocks do
best in such an environment, provided the equity market is not crashing.
We have already had two 50% declines in the last ten years. We are
following the typical pattern of a secular bear market. The pattern calls for
a cyclical bear market over the next few years. The private sector has
already had to deal with two recessions in ten years. It is prepared for this
environment. This cyclical bear will be a government-led recession in which
high inflation and rising interest rates hurt growth. Meanwhile, households
are still in a delevarging process that will last
another five years at least. It is a muddle through environment.
For gold stock investors, this is nothing to fear. This is exactly the
environment we need for gold and silver stocks to flourish. Their relative
strength amid the equity carnage is a positive omen. They are starting to act
as called for by the aforementioned history. However, we do understand why
some investors are concerned. Equities are selling off and with 2008 in the
rear-view mirror this can be even scary for Gold.
Jordan Roy
Byrne
Trendsman.com
Jordan
Roy-Byrne, CMT is the editor and publisher of Trendsman.com. You can get a
free 14-day trial to his Gold/Silver service by clicking
here.
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