Yellow Rocks Over Falling Stocks

I was talking to a financial advisor awhile back about their firm’s investing philosophy, and they told me they couldn’t imagine giving their clients a significant allocation towards gold. Over the long-term, they assured me, stocks will invariably generate better returns.

Ironically, that shiny yellow metal has outperformed stocks by a pretty handsome margin over the last twenty years, which is probably about when they started investing. In my book, twenty years is a long time.

Don’t get me wrong, for most of the last decade, gold has been a pretty terrible place to be. An investment in gold at its 2011 peak and held until today would have yielded a whopping 3.7% return. For those keeping score at home, that’s 0.31% per year. Yikes.

Over that same period, an investment in the S&P 500 returned 322% – more than 13% per year. Being a gold bug is equally as dangerous as casting the metal aside simply because you don’t believe in its fundamental merits. There’s a time and a place for everything in investing.

More and more, it’s starting to look like the time and place for precious metals has returned.

Gold is touching new multi-year highs when compared to stocks.

Ratio analysis is one of my favorite tools. By taking the price of one security and dividing it by the price of another, we can easily identify relative strength and evaluate the merits of that investment. We’re not limited to what we compare, because we’re comparing that one thing all assets have in common: price.

The best part is that we can apply the same basic principles of technical analysis to ratios as we do to any price chart. In the chart above, we can see how Gold/SPX found resistance near 0.50. It then spent the next year consolidating below that resistance level, but above a rising 200-day moving average. We should always expect consolidations to resolve in the direction of their underlying trend.

Last week, it did just that.

On an absolute basis, Gold is still stuck in a multi-year range between $1680 and $2060. But it’s approaching the top end rapidly.

To get through, we’ll likely need to see confirmation from other precious metals. During bullish periods for gold, silver tends to outperform. During 2023, though, silver has lagged. Last week’s 10% rally pushed it back above the low end of the 2020-2021 trading range. Perhaps that will be a catalyst for renewed strength?

If it is, this rally in gold could just be getting started. Who’s to say we haven’t spent the last decade setting up for a repeat of the epic 2000s rally?