Is Gold the Next Leader?

By Michael A. Gayed  MAR 07, 2013 1:30 PM

Gold is nearing another major relative support line. Could strength return just in time for a stock market correction?

 


Cruel leaders are replaced only to have new leaders turn cruel.
--Che Guevara
 
I've talked about gold a few times here on Minyanville, making the case that over the past three years, the precious metal has served more as a deflation hedge than an inflation one. On every iteration of Quantitative Easing by the Fed, it has been stocks that have benefited the most.  Much of this may be due to the idea that with every round of easing, the odds of company buybacks increase as corporate executives borrow to buy shares.  Money has favored that which has had shrinking supply over a static one, providing stocks with a clear advantage there, given the incentives that low rates create.
 
Gold has been a major underperformer relative to stocks, making the pain trade in terms of opportunity cost quite high.  Take a look below at the SPDR Gold Trust Shares ETF (NYSEARCA:GLD) relative to the SPDR S&P 500 ETF (NYSEARCA:SPY).  As a reminder, a rising price ratio means the numerator/GLD is outperforming (up more/down less) the denominator/SPY.
 

 
Note that since the mid-November 2012 correction low, gold has far underperformed broad market equity averages.  I have included two relative support lines to show that the first one was broken, and that we are now nearing the second.  The trend is still down, but I suspect leadership can occur in the weeks ahead given the magnitude of underperformance.
 
This in turn would fit in with the deflation pulse/correction call I have argued for since the end of January (early yes, but jury still out if it's wrong).  My firm's ATAC (Accelerated Time and Capital) models used for managing our mutual fund and separate accounts remain defensive, and we maintain that internals are not confirming absolute price excitement.  If indeed a reconnect occurs, gold can outperform, and would likely do so just as the three-year ratio gets hit. 

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No positions in stocks mentioned.

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