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Precious Metal Stocks Most Oversold Relative to the S&P 500 in History


Expect a big rally for gold stocks in March.

On February 20, precious metal stocks were the most oversold relative to the S&P 500 (INDEXSP:.INX) in history.

The oldest daily precious metals index is the PHLX Gold/Silver Sector (INDEXNASDAQ:XAU). Its data goes back to December 19, 1983. The indicator that was the most oversold in history is the XAU:SPX RSI (21).

The XAU:SPX is the ratio between precious metal stocks and the S&P 500.

The RSI(21) is the Relative Strength Index. This is a quantitative indicator which measures how overbought/oversold an asset is over the last 21 trading days (i.e. one month). Normally this indicator is used with a specific stock or index. However, today we are going to look at the RSI of a ratio. To avoid redundancy, all RSIs mentioned in this article are 21-day RSIs. Also, if there were a group of low RSI readings around a specific time, only the lowest one is shown here. Without further ado, here is the data:

What happened next to precious metal stocks?

All the numbers you see in the next table are XAU returns (not the XAU:SPX ratio moves) in relation to XAU's close on the signal date.

When will the initial rally end? The data suggests it will be 20 to 40 days from the signal date. However, if you take the initial bounce peak date and subtract from it the low date an interesting pattern emerges:

Once gold stocks bottom, they seem to have a 15- to 20-day rally. Since the XAU index hit a new low on February 28, that is now Day 0. Conveniently, March 1 is Day No. 1. If gold stocks hit a new low, reset the Day Count to zero and start counting to 15-20.

Since this indicator is not precise with respect to timing the bottom, it is unrealistic to expect to capture the returns from the low to the bounce peak. The main point here is that gold stocks seem to rally 15-20 days from the low.

However, do note that if you bought gold stocks at the signal date close, you still would have made at least 12.4% within 37 days even if they went lower. The February 28 close of the XAU is 0.24% below the February 20 close. Therefore, the tables listed above provide a reasonable template to what may be expected in the future with respect to returns. March should be a very good month for gold stocks.
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No positions in stocks mentioned.
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