Have we seen this golden movie before?

In recent days, the blogosphere has gotten excited about a potential turnaround in gold and gold stocks. Specifically, technicians have pointed to the rally in gold (top panel of chart), the gold stock to gold ratio (GDX/GLD, middle panel) and the better performance of high-beta silver to gold ratio. All of these point to better times for the bullion price.

The jury is still out
I wrote in a recent post that it is important to remain apolitical in investing (see Are you a good capitalist) and Barry Ritholz has also reiterated this theme in recent days as well. In that spirit, I want to analyze the excitement about the possible technical breakout in gold and gold stocks.

First of all, consider the chart above, but with a five-year time horizon. An examination of the longer term pattern shows that only the GDX/GLD ratio (middle panel) has staged a rally out of a relative downtrend and now displaying a sideways basing pattern.

The other two, namely gold and silver/gold ratio, are rallying up to test their long-term downtrends. A more bullish interpretation could be that these two ratios have rallied out of relative downtrend (dotted lines) and they are now consolidating sideways (shown in grey).

What about the dovish message from Janet Yellen? Could that not spark better performance for inflation hedges like gold?

Yes, but other charts of inflationary hedges have not confirmed the upside breakouts in gold and gold stocks. The relative performance of TIP to AGG (Barclays Aggregate Bond Index) shows that TIPS have started to turn around in relative performance against the bond market. However, we have not seen any signs of a breakout.

Similarly, the relative performance of metal and mining stocks (XME) against the SPX shows a similar pattern of a rally out of a relative downtrend, but XME remains in a sideways relative consolidation pattern.

In conclusion, the short-term outlook for gold is promising. However, with the golds having moved so far so fast, they are a little extended here. I would like to wait for more conclusive evidence of upside breakouts before jumping on the gold bull story.

So rant about the Janet-the-dove-Yellen and the Fed all you want. Wear the tinfoil hat if you want, but I would remind readers who are overly dogmatic about gold that the ultimate truth about being a gold bug can be found here.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this blog constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or I may hold or control long or short positions in the securities or instruments mentioned.