I posted a few months ago about the breakout in gold. It was so obvious it made me wonder whether it was going to turn out to be a fake out. I had my doubts. At the time, it was a textbook technical setup for a trade not a long-term buy and hold position. Since then, from a purely price perspective, it has done everything an investor could hope (up ~10% in less than 3 months), pausing where it should have and looks like it is ready to complete the initial breakout pattern as it is making a push to its upside target. In spite of all these positives and because we want to only be over-weighted investments that are outperforming the benchmark, there was no reason to be over allocated because it has been under-performing the US stock market (SP500 index) … that is until just recently.
Ya gotta love ratio charts as they easily let you compare investment performance and thereby providing a path to improve performance. Remember, when looking at a ratio of gold to the SP500, if the ratio is falling, gold is under-performing and when the ratio is rising, gold is outperforming. Taking a look at the ratio of gold to SP500 chart below, you can see gold has been severely under-performing US stocks for 7 years. In fact, the SP500 has outperformed gold by more than 70% over that time period. For gold investors, those were 7 lost years. What is very interesting is the chart is now telling us that probability of future under-performance from holding gold may have ended. Notice how the ratio has broken the long-term (red) downtrend line? Just breaking the trend line is only a start. To confirm, after the break you want to see a new uptrend beginning as defined by higher highs and higher lows. I have illustrated the chart to make its recent confirmation clearer … #1 marks the first higher high, #2 the first higher low and #3 the second higher high. If, (this is a big if) the ratio goes on to make another higher low, we can say with high confidence that the secular under-performance of gold in relation to US stocks has ended.
Why this is such a big deal is because gold has historically been an investment that trends and trends for long periods of time (years). If this is in fact the start of a new secular trend, it’s an ideal time for investors to begin rotating money out of US equities and into the precious metals complex.