Big Stocks vs. Gold Bullion vs. Gold Miners: What's Going On?

For this weeks edition of the SIA Equity Leaders Weekly, we are going to cover off the Gold situation as it continues to be a weak performer compared to the Equity Markets. In addition though, we are going to offer a couple of strategies for those who "need" to maintain a Gold position in their portfolios. Although the practice of maintaining an underperforming asset class and holding are not something we would ever recommend at SIA, we do understand that as an advisor your hands can be tied in certain circumstances.

SPDR S&P 500 vs. SPDR Gold Trust (SPY^GLD)

For our first chart today, we are going to look at the S&P 500 vs. Gold Bullion comparison chart. We can see in the chart that a significant relationship change happened between the S&P 500 and Gold Bullion in October of 2011 with the S&P starting to outperform Bullion. This change of direction had been seen a number of times since 2005, so for those not watching the Asset Class Rankings, it could have been thought of as a short-term situation. In March/April of 2012 though, the long-term downtrend line was broken indicating a significant longer term change in the strength of the S&P 500 over Gold Bullion. Since then, this relationship has proven to be the case with dramatic outperformance of the S&P 500.

It is this type of comparison chart evaluation in conjunction with the Asset Class Rankings that can give us an objective view on a situation and defend us from a "thesis" on Gold or other investments, that just isn't holding water.

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SPDR Gold Trust vs. Van Eck Gold Miners (GLD^GDX)

In the above analysis we highlighted the warning signs that the Bullish Gold story was going awry. Even in spite of the negativity for commodities, gold, and gold stocks found in the Asset Class Rankings, Sector Report Rankings, and pretty much any comparison chart over the past couple of years, there are those that wish to hold Gold as a core holding. So with the chart to the right, we are going to give two options to keep your clients happy.

For those who wish to have a core holding in Gold, it is presumable that holding either Bullion or Gold Stocks should satisfy most investors. The opportunity that lies in comparing Bullion vs. Gold Stocks is that for intermediate time frames, either one or the other outperforms. For this reason, if you need a core position in Gold the opportunity during weak and strong times is to own the stronger of Bullion or Gold Stocks.

The chart shows us that from 2007 to late 2008 Gold Bullion outperformed Gold stocks. Then, from late 2008 until the mid part of 2011 Gold stocks outperformed Gold Bullion. Finally, from the mid part of 2011 to present Gold Bullion has outperformed Gold Stocks. Since June 1, 2011, Gold Bullion in the form of GLD has lost -17.64%. In comparison, Gold Stocks in the form of GDX have lost -57.64%. What this means is that by taking the time to understand the relationship between Gold Bullion and Gold Stocks, a core position in Gold Bullion could have saved Gold Stock investors 40% of the their position.

As a second alternative strategy for those who wish to maintain a core Gold position in their portfolios, a "pairs trade" opportunity exists. By being "long" the stronger of Gold Bullion or Gold Stocks and "short" the weaker of Gold Bullion or Gold stocks you could have profited from this comparison chart analysis. In the most recent change of direction, a $10,000 long position in Gold Bullion would have a current value of $8,236. A $10,000 short position in Gold Stocks would see a current value of $15,764. If the positions are closed, a return of $4,000 is achieved. With $20,000 at work this equates to a 20% total return, not bad for a core position and a strong alternative to accepting the huge losses of the past 2 years.

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