Category Archives: gold bugs

Since our January 2017 posting on gold and precious metals stocks, the price of gold has increased +3.48% while at the same time precious stocks have declined –5.87%.  There are some contradictions in the movement of each indicator which we will interpret below.

Since May 2016, gold and gold stocks, as represented by the Philadelphia Gold and Silver Stock Index (XAU), are managing to give us the most structurally significant pattern that a tea leaf reader could ever want.

Everything becomes easy with the pattern that has evolved.  According to Dow Theory, this is what is expected at this time in this excerpt from a 1939 series of articles in Barron’s that later became the book “Making the Dow Theory Work” by Sparta Fritz Jr. and A.M. Shumate:

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In the month of July 2016, gold increased +1.60% and gold stocks increased +12.94%.

The gold market is off and running.  There are many reasons for the current rise in the price of gold but it is all after the fact and may only be guessing at best.  It is important to note that “Brexit” has occurred six months from the respective lows in gold and gold precious metal stocks with each rising as much as 28% and 165%, respectively.  To our minds, giving credit to the turmoil in the UK for the increase of precious metals is somewhat misplaced and could lead to more wrong conclusions than a single “right” one.

All that we’re considering is the price action and that alone is giving us food for thought. Below is the performance for gold and gold stocks from April 1, 2016 to July 1, 2016.

Since our posting on June 5, 2016, the price of gold has increased by +8.02% and the gold stock index has increased by +15.09%.

If you like a rising market then you definitely want the price of gold and gold stocks to increase above the level of $1,294 and 92.85, respectively.  Otherwise, there will be a big blowoff in the gold market and sizable downside risk.

Good News, Bad News

Since our March 2016 posting, the price of gold has decreased by –5.00% while the Philadelphia Gold and Silver Stock Index (XAU) has increased +4.45%.

Since our February 12, 2016 posting, the price of gold has increased by +3.04% while the Philadelphia Gold and Silver Stock Index has increased +10.07%. 

There is the mistaken view that in order to verify the trend in the precious metals market based on Dow’s Theory, investors should compare the price of gold with the price of silver.  In fact, this is incorrect.

Gold and gold stocks have made a turnaround in the declining trend that has persisted over the last several years.  The reactions to a dramatic rise or fall in commodity prices is usually equal in violence and magnitude.  Gold has increased +15.59% while gold stock has increased +27.90% since our last posting.

There is a lot of excitement in the gold investing community as there is the belief that this may be the long awaited bull market in gold which has been attributed by some by the advent of negative interest rate policies in major economies like Japan.  We remain hesitant to believe that all is well in the gold sector as this is the third year in a row that gold has started strong.  The last two years (2014 & 2015) both ended in the loss column for the year, in spite of the early gains.

The above chart shows exactly how gold garnered early gains.  For 2014, gold ended the year at a loss of –1.55% while the XAU index declined –21.11%.  For 2015, gold fell –9.55% and gold stocks fell –35.89%.  The early gains for 2016 are nice but new investors should accept what may come if there is a repeat of the last two years.

Gold and gold stocks continue to struggle in an effort to remain in a trading range rather than collapse.  A fall is coming if we see the general equity markets decline, which would compound the abysmal performance of the precious metal stocks over the last five years.

Gold Stock Indicator