At the end of July we wrote an
article examining the relationship between gold stocks and general equities.
We sought to understand the huge variance in performance between the two
markets. Sometimes they trended higher together. Sometimes the gold stocks
surged while conventional equities fell into a bear market. Both markets have
endured bad bears at the same time. Is there any rhyme or reason to why such
variation?
Here was our conclusion:
What can history tell us
going forward? The key is the correlation. If gold stocks are trending higher
with the equity market into a potential recession and bear market, then the
gold stocks would remain positively correlated over the intermediate term.
However, we can see that if the gold stocks are in a cyclical bear while the
broad market is nearing a trend reversal or while the economy is nearing
recession, then the gold stocks will remain negatively correlated. This is
evident in three of the four previous examples.
Interestingly, two of those
instances occurred during the second half of the 1960-1980 bull market. The
equity market (Dow) is in blue while the Barron's Gold Mining Index (BGMI) is
in red.
Previously we referred to the
decoupling as two separate points but in reality, the decoupling began in
1972 and lasted into early 1978. The above chart shows how the BGMI surged
right as the DOW entered a cyclical bear market. When the DOW bottomed, the
BGMI peaked.
Note how the BGMI bottomed in
late 1976, just as the DOW's recovery petered out. The decoupling didn't end
until early 1978.
Although no one (to my
knowledge) has publicly discussed the current decoupling, it is clear and
obvious for all to see. This decoupling began at the end of July 2011. Since
GDX peaked, it is down 32% while the S&P 500 is up 25%. (Silver is down
32% and Gold is down 14%). Also, the S&P is closing in a five-year high
while GDX is soon to retest a multi year low.
Going forward, we have the
setup for an amazing contrarian opportunity. The trigger is an exacerbation
in economic data and the general markets. As long as the markets are trending
higher then Gold and gold stocks won't get much of a bid. However, once
markets lose momentum and the threat of increased policy becomes apparent, we
will see precious metals confirm their bottom and resume their still
fledgling cyclical bull. Now is the time to be vigilant but patient as these
markets prepare to test their lows. Once these markets test their lows and
flush out the weak bugs then that is the time to be a vulture. Speculators
and investors are advised to carefully seek out the large or small companies
which are poised for the best rebounds.
Good Luck!
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