S&P May Outperform Gold During "Resting Period": Technical Analysis

Thu, Sep 15, 2011 - 10:32am

To attempt to catch the market bottom or top is difficult at best and dangerous to overall wealth at worst. However, trying to stay with the overall market trend is relatively easy. Last month I highlighted the relationship (or relative strength) between the SP500 and bonds. Little has changed, although it can now be argued that over the past month stocks have done better than bonds, however not enough to warrant switching back to equities. Let’s take a quick look at one of investor’s favorite investments – gold. Given the lack of long-term direct investment vehicles for gold (ETFs have only been available for past few years), I am using one of the gold mutual funds. It shows the ebb and flow of the performance when compared to the SP500. Given the run that we have seen in gold and even gold mining issues, it may be time for a rest.

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According to Morningstar, First Eagle Gold (SGGDX) fund is among the top third of all precious metal funds over the 5, 10 and 15 year periods ending this month. While not always the best fund each year, the long-term track record is at least a fair representation of the overall markets given that First Eagle holds both bullion as well as mining companies.

For all the clamor today to own gold as “the” investment for the next decade as governments try to devalue their currencies in order to have a shot at debt repayment, the chart above shows that gold has gone through long periods of performing worse than the SP500. Again, the chart is not of absolute price, but compared to the SP500, so a rising line shows the gold fund performing better, while a falling line shows the SP500 performing better. Another characteristic of the chart above is the dramatic and short periods of time when SGGDX outperforms followed by the long “resting” periods before another short period of outperformance. The four trend lines in the chart depict SP500 outperformancing from 9 to 28 months, averaging just over a year and a half. The short-term spikes starting in 2005 have been relatively short, between 3 and 7 months, averaging 5 months in length. Given the current spike is 3 months in length, it may last into October before the SP500 begins to reassert its performance dominance. How long could the SP500 best gold?

With the exception of the financial collapse, each spike higher was revisited just over two years later. For example, the peak in gold performance vs. the SP500 first occurred in November 2003 and was roughly matched again in June 2007. There have been three such periods over the last eight years. So what? What is most interesting in reviewing the performance of gold stocks/bullion during this bull market in relationship to the SP500 has been the relatively orderly moves higher, followed by orderly resting periods that have carved out an upward stair-stepping pattern.

IF this relationship were to hold in the future, we could expect gold to be at or near a peak relative to the SP500 at current levels. While gold/gold stocks could still advance, the SP500 would perform better. Since the last peak was initially reached between August and November 2010, the SP500 would outperform gold into late next year before gold (relative to the SP500) spikes higher early in 2013. If a story were to be wrapped around the future, the time frame would coincide with the elections next year and the inauguration.

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Managing Director
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