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Markets
tend to have no set rules that always work. Especially on shorter term
time frames. But as you stretch the time frame out to the longer term
general guidelines start to form for how markets behave. This includes
concepts such as bear markets following bull markets, and bull markets
following bear markets. Periods of overvaluation in stocks tend to be
followed by periods of undervaluation. And relationships between asset
classes tend to switch as one asset class becomes extremely overvalued or
undervalued against another. The market hates extremes so by definition trends that reach
extremes tend to eventually reverse.
With
that being said one of the oldest trends in the market right now that is also
sitting at an extreme is long gold, short gold miners. If you follow
the gold market at all, you know that gold went up for 12 years in a row,
then had a horrific 2013 as it finally had a major correction.
That was previously one of the longest trends in the market to finally
experience a major reversal. Which in gold's case was a bull market
finally going through a bear market. But within the gold trend the
relationship of gold outperforming gold miners has been in place since 2006!
Gold stocks have been in a bear market versus gold for over 8 years!
Now one thing to note is not all gold stocks have performed as badly versus
gold as others. It's basically been a stock pickers' market for gold
stocks since the mid-2000s. If you picked the right gold stocks you
could still acheive outperformance versus gold. Also gold stocks did
have a major bounce from late-2008 until early-2011, where they did
outperform gold. But that bounce did not negate the overall trend of
lower gold stocks versus gold, starting way back in 2006.
The
chart below, comparing the HUI Gold Miners Index versus gold on a monthly
time frame, shows how this has unfolded. After forming a double top
versus gold from 2004 to 2006, with a negative divergence in the MACD, gold
stocks started trending lower versus gold. Then as the financial panic
hit in 2008, gold stocks got smashed, and dropped completely out of the trend
channel to the downside. This setup a trading opportunity though where
gold stocks rebounded versus gold. And they had a powerful rally which
brought the relationship back to the top of the channel. But then as if
to help forecast gold's major top in the fall of 2011, gold stocks resumed
the trend lower versus gold which continued into late 2013. Notice
though that the MACD didn't make a lower low in late 2013, which is setting up
a positive divergence in momentum. Also note that MACD is about to turn
back higher again, and this is a rare occurrence as the 3 major MACD crosses
defined the overall trend lower. The final crossover of the MACD
higher, at the bottom of the trend channel, could be where this trade is
about to finally reverse.
 
Now
let's zoom in on a more recent chart, a weekly comparison of the GDX gold
miner's ETF versus the gold ETF GLD. After the bounce ended in early
2011, gold stocks entered into another Stage 4
decline versus gold. A big negative divergence in momentum helped
forecast this transition. Then besides a bounce in 2012 the Stage 4
decline has remained intact until early 2014. But notice the massive
increase in volume coming into GDX vs. GLD that started in mid-2013, which is
coincidentally where gold bottomed. At the same time momentum started
moving higher, and has setup a positive divergence versus the price action.
Both volume and momentum are indicating a possible trend change once
again, as money flows back into the gold stocks relative to gold.
Even if
you're not convinced gold has reached a major bottom yet, like most of Wall Street, the relationship between gold
and gold stocks is still worth watching. Because big moves come from
old trades that are finally ready to unwind, and this is one of the oldest
trades in the market currently.
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