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Point & Go Figure: Gold vs. Gold and Silver Stocks; SLB, TNX



In the past couple of weeks, I've gotten about a dozen emails asking about gold and gold stocks, and whether the "stagnation" in the gold stocks compared to the metal itself may be telling us something.

Gold and gold stocks first showed up on my technical screen in February 2002 when the metal and gold stocks began simultaneously violating important multi-year downtrend lines on their point and figure charts. More aggressive types certainly could have speculated based on their charts that something was afoot much earlier than that, but being a bit conservative, I wanted to wait for a simultaneous violation before buying gold or gold stocks.

Gold 1999-2002 (4x3)

PHLX Gold & Silver Index 1999-2002 (XAU)

Since February 2002, the HUI is up 228%, the XAU is up 95.8% and gold is up 81.7%. Going farther back to what now looks like the absolute bottom for gold stocks, November 2000, the HUI is up 589%, compared to 183% for the XAU and 94% for the metal itself.

I'm not so sure the perception of "stagnation" in metals stocks is telling us anything about gold, but it may be telling us something about investor expectations.

Meanwhile, on a longer-term basis, which is in control right now? One way to evaluate this is to look at the relationship between the XAU and gold itself.

Below is a simple ratio chart, or relative strength chart, constructed by simply plotting the XAU versus Gold.

XAU vs. Gold Relative Strength

Since the buy signal (shown on the chart above) on July 1, 2003, the XAU is up 94.9% while gold is up 48%. The column this ratio chart is in is as important as the signal (buy or sell) the chart is on. In the PnF methodology, a column of Xs indicates an expanding relative performance versus the denominator, while a column of Os indicates an expanding performance for the denominator versus the numerator.

Between February 3, 2004 and May 17, 2005, gold was outperforming the XAU, as this chart shows with the column of Os second from the right. Over that time period, gold was up 4.6%, while the XAU was down 16%. The ratio began contracting after May 17, and on July 12 it reversed to a column of Xs indicating the XAU was ready to outperform gold. As recently as November 22, it added an X to the chart, and since that time it is still very near that level, suggesting the stocks are still favored over the metal. From July 12 to present, the XAU is up 31%, while gold is up just 21%.

Other items of interest:

Schlumberger Limited (SLB)

U.S. 10 Year T-Note Index (TNX)

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

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

Charts courtesy Dorsey, Wright & Associates.

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No positions in stocks mentioned.

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