Gold Update: 26th September 2014

You would never guess that gold, measured in euros, is +9% YTD, given the extent of the bearish sentiment on the precious metal today. Of course, many folks focus on the USD price of gold, which is only +1% YTD but for euro investors, it is the euro price of gold that is relevant. The USD has appreciated strongly versus the euro in 2014 and USD denominated assets have benefited. You can see the difference in euro gold (black line) and USD gold (grey line) in the chart below. Of course, after 13 straight years of price appreciation, gold was hit in 2013 by -30%, which has put investors on edge.

euro gold 2.png
 

So, when can we expect the gold bull market to return, or is it dead, as some analysts would lead you to believe? When looking for a potential turn, the gold mining stocks usually provide a tip off to investors ahead of time. At the bear market bottom for gold in 2000 when it was trading at $250/oz, the gold miners ignored the gold price declines and began a sharp rally months before gold did. Again in 2008, the gold miners bottomed ahead of the metal. 

Roll forward to today and after a very dramatic drop for the gold mining stocks over the past 2 years, they appear to be digging in here in recent months. We are definitely observing a change in behaviour for the sector. 

 

I can't say for sure whether the bear market in gold is at an end; only a close for gold back above the breakdown zone at $1,530 will confirm that. However, the price action for the mining stocks and the current depths of investor sentiment suggest that we are getting close. The ratio of gold mining stocks to gold for example has recently reached its lowest point since 1942.

 

In all likelihood, we may need to wait for the stock market to top out before the bull market in gold can resume. My Technical Trend Indicator (TTI) will help identify the turn. The next chart shows all past buy and sell signals of the TTI since 2007. The buy and sell signals have been infrequent but timely and I expect this trend to continue.

 

Although I cut back on the equity exposure in the model portfolio in favour of bonds (which have outperformed stocks in the last 12 months), as the equity bull market is now quite mature, the technical trend indicator has yet to give an all out sell signal. We are getting close, but not there yet. I believe that equities are on borrowed time and gold is getting close to a turn higher again but it could be another 3-6 months before it happens. Gold will only be safe again once it gets back above $1,530.

For more information on our gold market analysis, please contact Brian Delaney at 086 821 5911 or by email at brian.delaney@secureinvest.ie.