Is Gold Shining Again?

May 26, 2021  |  Michael Reilly

This week I’m going to circle back to an asset I wrote about in our February 22, 2021 edition of Adapt Weekly entitled “Will Gold Recover.” The crux of the article advised investors that Gold was an underperformer and should be avoided.

And that’s what it did. It underperformed. From the Feb 22 publication until April 30th, 2021, GLD was negative – losing -2.27%, while stocks (SPX) gained 7.86%. That’s over a 10% opportunity cost in just over two months, to any investor unwilling to accept what the relative strength charts were flashing.

If you’re interested in what I had to say in February, here is a link to read the entire article.

Here we are, fast approaching the last week of May, Memorial Day, and the unofficial start of summer.

Just as we adapt to the changing seasons of Spring and Summer, we, as investors, must also adapt to a changing investment climate.

And the climate for Gold in February was much different than what it looks like today.

Here is the SPDR Gold ETF (GLD), after bottoming in March and April, Gold has rebounded back to the 176 level.

And below you can see Gold’s recent outperformance relative to the S&P 500 (SPX), the Vanguard Total Bond fund index (BND), and 10 Year Treasuries (TLT).

Between April 30 and May 24th, Gold (GLD) has had an impressive 7.42% return, while SPX has barely moved the needle, gaining 0.20%, and our bond proxies BND and TLT haven’t fared any better, rising marginally at 0.34% and 0.74%, respectively.

It should come as no surprise that where new see absolute outperformance, we see relative outperformance and vice versa.

Below is a relative strength ratio chart, showing the Intermarket relationship between two Asset Classes – Stocks and Gold (growth assets vs. defensive assets).

The ratio compares the price strength of Gold to Stocks using the following ratio GLD: SPX. When the line chart is moving up, prices favor Stocks over Gold, as it did from January into April.

Conversely, when the line chart is moving down, price favors Gold over Stocks – that’s what we are seeing now. And that is reflected in absolute performance, as GLD has out-gained stocks by over 7% since April 30, 2021.

Gold miners have joined the party too.. Check out the relative strength of Gold miners – using the ETF GDX as our proxy. GDX has broken previous down trend lines relative to both the S&P 500 index and the Nasdaq 100

Again, where we find relative strength outperformance, we expect to find absolute outperformance and Gold Miners (GDX) have not disappointed,

In an environment that saw the S&P 500 index and the tech-heavy Nasdaq (QQQ) struggle – with the S&P pretty much flat-lining and the Q’s in negative territory -1.49%, Gold Miners jumped over 15% since April 30th.

The next logical question that’s always asked is “Will this short-term dominance of Gold and Gold Miners continue”? Well, the fact is we don’t know. Right now, there is no reason to believe it is changing, particularly when we consider other evidence.

The weight of the evidence currently leans towards Value over Growth and defensive assets and sectors over more growth-oriented ones. We’re in a climate of rising inflation and more talk about money flowing out of Bitcoin and back to the relative safety of Gold. So, we’ll see.

Markets change, we know that. So keep your eye on relationships like the one above to help dial in your own investing. And of course, check back next week to see what’s new!

If you find this article interesting or would like to learn more about how Rowe Wealth Management manages money click here to schedule a free consultation.

Until next week..

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