Will Gold Recover?

February 22, 2021  |  Michael Reilly

Welcome to ADAPT Weekly – our weekly publication to investors seeking some of the most rewarding investment opportunities in the markets today.

Through relative strength analysis, we uncover the strongest asset classes, sectors, and industry groups that are in uptrends and showing the potential for continued profits.

As an investor, your success and profits are tied to your ability to adapt to what markets are giving – to the asset classes and sectors attracting institutional demand.

Today, demand is in control of the market, and investor appetite for risk assets is insatiable. It’s in everything from micro-caps and small caps to emerging markets and even in the commodity space.

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For months, I’ve tried to make the case that based on price momentum, investors would be rewarded for being buyers of stocks, not sellers of stocks.

Equities continue to breakout above important and sometimes long-standing resistance levels to new highs and not just here in the U.S. but all over the world.

That’s what’s working – it’s been all about global equities.

But what’s not working? This week, I’m going to do something a little different.

I’m not going to do a deep dive into a sector that is showing promise as the next potential winner.

This week I’m going to focus on what isn’t working.

Wait.. what? Why?! Well, for two reasons really, the first is obvious….

If you have dollars committed to lagging assets or assets falling in price, your money is at risk of further loss. And let’s face it, that’s no fun.

And the second reason, which is much more subtle, but no less important, is a little something called opportunity cost.

If your money is tied up in a sector that is going nowhere fast or worse, steadily declining – all while you hold out hope for a swift turn around that may or may not ever come – that same investment capital isn’t invested in stronger, and potentially more profitable sectors, the ones showing relative strength and momentum – the kinds of sectors our algorithms are adept at finding.

And that’s the opportunity cost – missing out on other more profitable trades because your capital is languishing elsewhere.

So, let’s look at what isn’t working, so you can avoid owning this weak in the knees asset class.

You know what’s not working in this environment… Rocks! No one wants to own these useless gold rocks.

The chart below compares the relative strength of Gold to the CRB commodities index (black line).

The lower part of the chart compares the strength of Gold to the S&P 500 (SPX) (blue line).

The CRB index comprises a basket of 19 commodities, with 39% allocated to energy, 41% to agriculture, 7% to precious metals, and 13% to industrial metals.

The CRB is designed to reveal the movement of prices in the overall commodity space.

It’s not a pretty picture for gold these days. On a relative basis versus the S&P 500, Gold is seeing the lowest levels since 2019 (blue line).

And compared to other commodities (CRB Index) it’s look-out below because Gold is in complete free-fall.

Gold has been a terrible place to be since last summer. This isn’t my opinion – it’s about the price. Price doesn’t lie. Price is price and the price of gold versus stocks and other commodities is weak.

Do you know why? Because no one wants the shiny yellow rocks! It’s classic supply vs. demand. When the available supply outstrips current demand, prices fall.

That’s the story for gold in today’s environment. And that’s not likely to change much until stocks once again find themselves under pressure like they did last February.

So until the relative strength of Gold improves substantially, investors in Gold will be subjecting themselves to potential loss of capital and opportunity.

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.  

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