Will the shine of gold last?
Will the shine of Gold last?
As you may not know, SGG portfolio holds a core position in the precious metal complex and the recent price rise has been attracting much attention. There is a certain optimism which can be measured and some more frequent headlines with price projections in line with such mood. My overall impression is that such optimism will encounter some bumps along the road but yes…..you should have exposure to the precious metal complex in your portofolio as an hedge to the stranger times ahead.
Here are a few charts since pictures are worth many words.
- The ratio of the Gold Price / S&P 500 (red line) shows rthe recent rise as a small blip. The light orange line is the gold price and the light green is the S&P 500 index. The interesting part here is that the all time of the S&P 500 is not an all time low for the Gold ratio. It looks like that Gold will perform better than the S&P 500.
2) Here we have the Gold & Silver Philadelphia mining index (XAU) / the S&P 500. (red line). It looks like the long term underperformance of the miners is over and we have a nice double bottom in place. I cannot draw a longer chart (sorry) but we are talking almost 40 years! If confirmed, the relative miners outperformance might become quite interesting. For pure equity investors…. switching S&P 500 into miners looks like an attractive option.
3) Similar vision with the XAU / GOLD ratio (red line) and similar comments as above. Gold & Silver miners index is trying to break an importance resistance. Holding miners in the precious metal complex is part of the approach
4) Gold in foreign currencies (red line) and the USD currency index in green. Observe the inverted relationship between the USD and GOLD. Strong USD = usually weak Gold! The recent Gold rally has gone in tandem with a strong USD too which is kind of unusual. We need to keep in mind that we have about USD 15T of negative yielding debt (Switzerland up to 60 years now) which in my view is supportive for gold price. Trump is pressuring the FED quite a bit but the most probable outcome will occur by “itself” since the USD liquidity squeeze is knocking at the door. The FED will do “QE” aggressively !
5) The GOLD / Silver ratio (red line) . I call Silver the Gold of the poors. In my view…. it might become a better option. Gold has become an important component of central banks reserves like Russia and China and therefore the political weight on Gold is increasing. How to buy and hold the precious metal is an important decision since history shows us that governements can take decision against your freedom.
In regards to the shine of gold….
6) The ratio of the Junior Gold miners to the “mature” (GDXJ /GDX) ones is not yet flashing a green light. The 2015-2016 outperformance of the Junior miners was quite impressive. The overall ratio is construtive but we need some more action to really confirm the “Gold Shine”.
7) All look at the cash price of Gold but it is important to compare it to “future cash” too. Future Cash is the long term US treasury benchmark best expressed by the long term zero coupon bonds (ZROZ ETF). Here, the GOLD/ZROZ ratio still show Gold hovering near its lows. You can observe that since 2015, Gold price relative to zero coupon bonds has been building a base line (trading range). I would expect a clear break upwards to confirm the Gold Shine.
On a similar note…. the same ratio but with Silver (Silver/ZROZ). Quite a few obstacles on the way but maybe a nice opportunity for “bottom fishers”.
8) Investors tend to always look at the performance of the equity market as the main driver of their portfolio. The ratio of the S&P 500 to Zero Coupon bonds (SPY /ZROZ) show us that long term bond investors are basically “flat” since 2011 (no longer chart , sorry). My mind set is more on the deflationary side so I tend to believe that US interest rates can go much lower. I rejoin Trump in the sense that I never really believed in the rate increased cycle of the FED.
So, what could really create a long term Gold rally? The over leveraged situation of our economies are showing that much more stimulus will be needed. Modern Money Theory (MMT) is on the way one form or the other. Japan is ahead of us as an example but the growing political polarization climax will be a driver for MMT action. The GREEN in Germany is the tip of the iceberg of an important change to come. “Save the Planet” at whatever costs seem to be the GREEN modus operandi and therefore MMT is in the card. The old Weimar Republic guard which has been behind the German discipline will fade away and open the door to “monetary creativity”. At some point in time…. people loss of confidence in governement will grow and general public will feel comfortable holding precious metal as an hedge.
