Recently dozens of gold stock indicators reached extreme levels. This article will examine one in detail.
The top chart is of the oldest daily gold mining stock index (INDEXNASDAQ:XAU). The bottom chart is the ratio of XAU to its 252 trading day moving average:
Click to enlarge
At the April 17 low, gold stocks were trading at 0.62 of their moving average. That was near the level of January 12, 1998 when the ratio was at 0.63. That was the exact day of the start of a 52% rally which lasted 3.3 months. On August 31, 1998 the indicator again hit 0.63. That led to a 79% rally in 38 days.
This brings us back to 2008. Gold stocks first traded 0.62 of their moving average on October 6, 2008. This was a mere 18 days from the low. But those last 18 days were a doozy as gold stocks dropped a whopping 39.6% in those 2.5 weeks.
However, back then “regular” stocks were in an epic bear market as well. Let’s isolate the underperformance of gold stocks relative to the S&P
(INDEXSP:.INX) by first calculating the ratio of gold stocks to the S&P and then calculating that ratio in relation to its one-year moving average. A different picture emerges.
Click to enlarge
On May 17 the ratio of gold stocks/ S&P 500 to its 252-day moving average reached the lowest reading in the history of the XAU (which dates back to December 1983). Here are the significant lows of each time period:
December 9, 1997
: Gold stocks rallied for a couple of weeks and then retested the low. Gold stocks went 3.7% below the Dec 9, 1997 low on January 12, 1998 and then had a 52%
rally which peaked on May 23, 1998.
October 23, 2008
: Gold stocks dropped 6.5% intraday the next day and then staged a reversal. That intraday low turned out to be the bottom. Gold stocks proceeded to go up 266%
to their December 7, 2010 high.
July 2, 1986
: Gold stocks went down another 3.2% to their July 25, 1986 bottom. Then they went up 167%
to their September 18, 1987 high.
This looks promising. But is the indicator robust? Let’s test it with the Barron’s weekly data (available from chartsrus.com) which goes back to 1938.
Using the 1938 data, there were seven instances when the indicator approached the current level. These instances can be called "The Magnificent Seven." There were times when it spent a number of weeks below the recent level. The dates listed below are the first week it reached 0.65 in each “group.”
The Magnificent Seven
December 19, 1969
: Gold stocks went down 0.24% over the next two weeks. They haven’t seen that level since. From that low, gold stocks went up 83%
over the next 1.3 years.
August 6, 1976:
Gold stocks went down 15% over the next three weeks. They haven’t seen that level since. From that low, gold stocks went up 554%
over the next 4.12 years.
June 18, 1982
: This marked the exact bottom of the first leg down of the great 82% bear market for gold stocks. Gold stocks experienced a 205%
bear market rally over the next 210 days.
July 4, 1986:
See the XAU analysis above for further details.
November 21, 1997
: The Barron’s signal was triggered 18 days earlier than the XAU signal. While there was limited downside in the XAU example, gold stocks got hit hard from November 21, 1997 to Dec. 9, 1997. While the Barron’s old weekly data is extremely valuable, when it comes to post 1983 it is probably a better idea to use the daily data for more precise timing.
October 24, 2008
: The Barron’s signal was the exact day of the low. See the XAU analysis for further details.
April 18, 2013
: This date marks the lowest the Barron’s Gold Mining Index has been since January 23, 2009.
Here is the summary table intermingling the Barron’s data from 1938-1983 and XAU from 1984-2013.
No positions in stocks mentioned.
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