Buy, Buy, Buy

Buy, Buy, Buy

August 8, 2017 Off By Chuck

It seems those writing newsletters and also (coincidentally, wink, wink) sell gold never seem to change their story.

All kidding aside, I do realize there will likely be sometime in the future where gold (and other precious metals) could, once again, be worthy of more than just a portfolio hedge or a diversification tool. As such, I like to occasionally check in with the metals to see if there are any new clues or setups in the making. In today’s look, I am reviewing the ratio of US stocks (SP500) to the price of gold. When looking at ratio charts it’s always best to keep things simple and not over-complicate the analysis. So in this case, when the long-term ratio is rising buy stocks, when it’s falling buy gold (I told you it was going to be simple). A different (lower risk) approach would be to create a pairs trade of buying SP500 and holding an equal amount of gold short.

As you can see the ratio bottomed back in the second half of 2011. Of course we did not know that was “the bottom” until much later in our rear view mirror. In fact from 2009-2013 there was really NO advantage of holding one over the other as they were performing virtually the same (hence the sideways choppy consolidation of the ratio). That all changed in early 2013 when the ratio created a higher high (a break above the blue horizontal line). From that point on, stocks became the better investment and continue to be to this day. This will change someday but since it has not happened yet nor I do I know when it will, watching this chart and waiting until the ratio turns down and eventually forms a lower high and lower low will be my signal. My guess is it could be longer than we think because market trends tend to last for many years and this one is relatively new. Until the trend changes, those wanting the greatest returns would do best to keep their gold investment to a minimum and maximize their exposure to equities (SP500). Gold bugs and metals newsletter writers on the other hand, know that one can never own enough of the shiny stuff so it’s a great time to buy, buy, buy.