Gold is a commodity that continues to be in vogue whether in a bear or a bull market. There will always be ardent fanatics warning of the next financial calamity at which time gold will be the only currency. The other side argues that adherence to a gold standard is a relic of ancient times; after all, how many multi-millionaires made their fortune by owning gold? Detractors of such skepticism insist that during times of tumult, gold will be the only asset of any value. Clearly there is an appetite for gold and therefore gold mining companies regardless of one’s sentiment. Following our philosophy of trading, it doesn’t matter what we think, it only matters if other people want it…much like Taylor Swift music.
So we take a look at the longer term monthly chart of gold prices extending back to 2002. Sure enough, the metal has been riding a long uptrend interrupted by a pothole in September of 2008. Odd that in the face of financial calamity at the time, that gold would sell off. In any case, gold resumed its advance to peak out over 1900 per ounce in 2011. Since that time, the price of the metal has meandered sideways to down, bottoming recently in the 1050 area.
It’s useful to look at these charts with some perspective, so we’ll have a look at some google charts showing relative returns from the gold ETF proxy, GLD, as well as the SPY over different time frames. First to the shorter one year comparison:
The above chart tracks the return of GLD vs SPY over the course of just over a year. We can see that up until July of 2016, GLD actually outperformed the SPY handily until the end of the year. Since then the returns are more equal with GLD still holding a slim edge. This despite the SPY hitting new all time highs.
In the chart below, the time frame is zoomed out to look at returns over a longer period of time, starting from 2012. In this period, SPY easily beat out GLD as an investment vehicle as shown by the widely divergent lines.
Finally, in the chart below, the time frame is moved back again to include activity from 2002. Perhaps to the surprise of many, myself included, GLD has been a much better performer than the SPY and even as the lines converge, it is still ahead of the SPY. When you stop to consider all that has happened in the last 5 or 6 years, it’s hard to make sense of Gold’s drop off in price since we know that the total US debt has doubled from 1o to almost 20 trillion in the past 8 years. Interest rates have dropped to virtually zero in order to buttress the US financial system and economy. Yet gold has been declining. It doesn’t look like a fear play to me. Still, the price of the metal has maintained its investment value relative to the SPY. For this reason, we will be on the lookout for a significant turn.
The final chart is a monthly picture of gold itself. Similar to the GLD chart, an extended rise in the early part of the 2000’s has settled off into a down to sideways trend for most of the past 6 years. None of the derivative momentum statistics gives any evidence of an emerging trend. I would characterize this as sharply sideways. Until there is enough evidence to show that another gold rush has begun or a downtrend has resumed, any positions we may take in specific gold issues will be short term at best.