Is Gold Finally Ready to Shine?

November 23, 2021  |  Michael Reilly

Last week, an ADAPT Weekly reader asked about my thoughts regarding investing in Gold…

Not that my opinion is all that important – remember, the only thing that pays to watch is price.

I’ll say it again: If you’re going to pay attention to anything, pay attention to price.

So here’s the scoop…

We’ve avoided gold for more than a year now, and for good reason – it was a chronic underperformer (as you’ll see in a moment).

However, there are signs that this underperformance could be changing.

Not only are gold futures moving higher in absolute terms, but they’re also finding support at a perfectly logical place relative to their alternatives.

It’s this Relative Strength that investors will want to know about.

Here’s what I mean – using Gold versus Commodities as an example.

Over the last year, the strength out of Commodities has made it difficult for anything to show relative outperformance.

You can see how Gold underperformed Commodities. See that line moving from upper left to lower right?

That’s a downtrend, ladies and gentlemen. Gold is showing a massive underperformance versus Commodities.

With that said, Gold looks like it’s trying to hold above a key area of former resistance that may become support. Makes sense, as this would be a logical level for gold to stop underperforming.

Now obviously, the market doesn’t care about my potential support and resistance lines. But as an investor, you’ll want to at least be aware of these areas of support or resistance and follow them closely for any sign of additional improvement or deterioration.

A strong reversal up from these levels indicates relative outperformance by Gold versus Commodities. And where we see relative outperformance, we also tend to find absolute outperformance.

We’re seeing improvements in other cross-asset comparisons as well – it’s not just limited to commodities. The picture looks similar when looking at the Stocks versus Gold ratio as it runs a key Fibonacci level.

What we’re seeing here is stocks losing Relative Strength versus Gold right at 2.80.

At the same time, Stock’s momentum is trending down, as seen in the lower panel.

So, assuming Gold can begin to exhibit real strength on a relative basis – how should investors get involved?

One way is through the SPDR Gold ETF (GLD). Another option is via gold miners.

In the chart below you can see how the Gold Miners ETF (GDX) recently bounced off a key area of former resistance now acting as potential support.

If GDX holds above 31, there’s some interesting upside here.

I already know what’s coming after you read this week’s article… I’m expecting several emails to the effect of…

“Nice timing Reilly, guess you didn’t see the price chart of GLD yesterday…”

Yes, I saw it and I’m aware that GLD slid 4% on the day.

So let me remind you – reversals of relative strength are a process, not a one-time event.

We’re interested in the trend, not a single day’s price action.

It’s too soon to anoint Gold as the Relative Strength victor, just as it’s too soon to claim Gold is dead in the water.

The point for investors like yourselves is to keep an open mind and be aware of changing relationships in Relative Strength.

Until next week, invest wisely…

PS: Want these kinds of insights applied directly to your portfolio as they’re seen? To make the whole investment process easier, give us a call. We’re opening our doors to new investors who have portfolios valued over $500,000. If you’d like to schedule a free 1-hour consultation to review your portfolio, click here.

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