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Point & Go Figure: Is Gold Outperforming Stocks, or Simply Keeping Pace?



In Sunday's New York Times, columnist Floyd Norris took a hard look at gold, asking if perhaps the yellow metal is acting just like, well, just another American stock.

To support his view, Mr. Norris displayed two charts, one a conventional price chart showing gold over the past decade in U.S. dollars, the other chart showing the price of gold divided by the level of the S&P 500. In market parlance, this is known as a relative strength chart. As Mr. Norris pointed out in his article, if the line is falling, then stocks are outperforming gold, and if the line is rising, then gold is outperforming stocks. Below is the graphic from the New York Times.

According to the line chart, it does indeed appear that gold is simply keeping pace with stocks over the past couple of years. However, if we look at the same type of chart in point and figure terms - very simply, the price of gold divided by the price of the S&P 500 - we get a slightly different story.

Relative Strength chart Gold divided by S&P 500

This chart basis is identical to the line chart, the only difference is that it is constructed in point & figure terms so that clear, definitive buy/sell signals are given based on the X and O formations.

The Gold vs. SPX chart gave a new "buy" signal on Oct. 11, a quadruple top break where the most recent column of Xs exceeded three prior columns of Xs. This "signal" suggests that the two-year relative performance range has been "broken out" and that gold might be expected to begin a new trend of outperformance.

What is most interesting about this long-term relative strength chart is the significance of the first "buy" signal off the bottom, which occurred on Sep. 18, 2001. (Incidentally, that was the first "buy" signal for gold since 1993.) This chart has not given a "sell" signal for the outperformance of gold relative to the SPX since, despite reversing down and coming close on four separate occasions since July 2003.

Since that initial signal, gold has risen 70%, compared to 59% for commodities in general as measured by the Reuters Jefferies CRB Index, 22.8% for the SPX, 45% for the Nasdaq Composite. It has also dramatically outperformed the Yen, Euro and U.S. dollar over that time period.

If you would like a chart reviewed, let me know here.

I have added text and illustrations to the charts where necessary.

Point & Figure chart courtesy Dorsey, Wright & Associates.

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