We have commented on Gold many times over the past few years but for this week's Equity Leaders Weekly we are going to examine how to analyze Gold's major trend by following the SIA Metals and Mining EWI Index and its movement within the SIA Market Sector Report, for clues about major trend shifts within Gold.
Gold Continuous Contract (GC.F)
Looking at the Point and Figure Chart of the Gold Continuous Contract (GC.F) on a 2% scale, we see the 10 year bull market in Gold starting in 2001 around $400 and ending in Sept 2011 below $1900. That was an increase of approx 370% during that timeframe. However, since its top in 2011, Gold has fallen approx 33% to the end of May 2014. For the past 12 months there have been numerous reports calling for the bottom in Gold and the start of a new long term bull market. Calling for the top or bottom of any investment is not an exact science and hence the frustration experienced by many investors as they got whipsawed by several false starts! So how can you use SIA's Relative Strength system to more effectively navigate through Gold's bull and bear market cycles? One way is to follow the movement of the SIA Metals and Mining EWI Index within the SIA Market Sector Report. This index is not comprised of gold stocks only as there are other types of metals and mining stocks within this EWI, however, gold stocks do represent a significant portion of this index. Utilizing this strategy would have seen the SIA Metals and Mining EWI Index move into the Unfavoured Zone of the SIA Market Sector Report back in June 2011. This certainly wasn't the top in Gold but did signal the possibility of a major trend shift in Gold three months before the top in Sept 2011. This would have been an important warning sign that something was happening in terms of the Relative Strength of Gold vs other sectors. Over the past 12 months there have been 2 false starts, first in July/Aug 2013, then in Jan/Feb 2014. Individual gold stocks began to move up the rankings within our Stock Reports in line with these Gold bounces, but they proved to be short-lived and declined again in line with the reversal in Gold. So how could you have prevented these whipsaws in Gold stocks during these 2 false starts? See the Matrix Position Chart for the SIA Metals and Mining EWI Index below for the answer.
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SIA Metals and Mining EWI Index (Matrix Position Chart)
The Matrix Position Chart of the SIA Metals and Mining EWI Index helps us to understand the relative strength of this index vs. 30 other sectors within the SIA Market Sector Report. Looking at this chart over the past 14 years shows that during the 10 year bull market in Gold, this index spent the vast majority of its time in the Favoured and Neutral Zones, with only a few shortlived movements into the Unfavoured Zone (2008 being the only exception). However, since its top in Sept 2011, this index has spent 100% of its time in the Unfavoured Zone and most of it has been at the bottom of the rankings within the SIA Market Sector report. And during the 2 false starts in Gold during July/Aug 2013 and Jan/Feb 2014, the SIA Metals and Mining EWI Index didn't move off the bottom at all! So even though some Gold stocks bounced quite strongly during these 2 false starts, this index didn't show signs that a major trend shift was occuring in Gold. When a major trend shift in Gold does occur, we would expect to see the SIA Metals and Mining EWI Index move up the rankings and eventually into the Favoured Zone. Examining the relative strength of this index alongside the relative strength of gold stocks can help to more effectively navigate through the gold cycles and reduce the unnecessary whipsaws. In addition to this sector index, you could also have examined the relative strength of the Commodities Asset Class within our Asset Allocation Model, which would have showed Commodities occupying the bottom ranking for the past 2 years coinciding with the decline in Gold.
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