Gold stocks to outperform US equities
Earlier this year I posted an analysis of the gold price and indicated that it was setting up conditions for an explosive upward move out of its three year chart trading pattern. The price recently broke out of this pattern as it attacked the $270 level. All the signals are now in place for the catapult in the gold price to occur. However it is not only the gold price that is of interest; the gold stocks have already been in major moves since the beginning of the year.
In this article I will continue my analysis of the gold price and examine the relative strength data relating to various stocks and indexes. In addition I will detail the end result of a massive research project on which I have been working that details the free trading availability of gold stocks.
Gold Price
I previously detailed the falling wedge pattern as the right shoulder of a reverse head and shoulders pattern on the gold price. The recent strength in the gold price has pushed it out of the falling wedge and indicates that it is ready to continue into a major bull market move. The rising oscillator in blue has been signalling the gain in momentum of the gold price for some time and has recently anticipated the upside break as it moved above the resistance at A. An upside breakout from the falling wedge will trigger the full count out of the pattern to $390 as the longer range target level.
Gold Indexes
Toronto Gold Index
The Toronto Gold Index is compared to the DJIA. For the past five years the gold index has dramatically under performed the leading US equity index. However since the start of this year the trend has turned upwards in favour of the gold index. In addition the blue oscillator is again illustrating the gathering momentum of this data in favour of the gold index. In the short term there is a minor resistance level but once above this and the gold index will show the US equities a clean pair of heels.
Philadelphia Gold and Silver Index
The XAU relative performance against the DJIA is an almost mirror image of the Toronto gold indexes performance. Once again there was negative movement for the past five years that has translated into a base reversal and commencement of a positive move since the start of this year. But in this case the XAU index has already shown its intentions of breaking above the short term resistance.
Another bullish chart that indicates gold stocks are ready to outgun US equities.
ASA
ASA is an investment trust quoted on the NYSE that holds 95% of its portfolio in South African gold shares. It is a dollar reflection of the performance of the South African gold market.
In this case two trendlines have governed the negative performance of this fund against the DJIA. The shorter term trend was broken at the start of the year and the longer term line is being severely tested right now. Again the blue oscillator shows the gain in momentum in favour of ASA.
This data is on the verge of a major breakout and move into a new bull trend of relative performance.
Irrespective of whether the gold index reflects Canadian, US or South African stocks the conclusions remain the same.
- The long term negative trend has been broken
- A solid base has formed
- Upside breaks are imminent
- All oscillators reflect an increasing momentum in favour of gold shares.
I must conclude that gold shares are ready to have a long-term period of superior performance to US equities, especially when measured against the DJIA.
Gold Stocks vs Gold Bullion
ASA vs Bullion
After 30 years analysing the gold market I have found that a true bull market in gold stocks only occurs when the shares out perform the bullion price and the shares lead bullion.
The long-term negative trend in which ASA under performed the gold price has clearly ended. BUT it has also broken cleanly upside away from all the minor resistance. This indicator of South African gold shares is leading bullion out of its doldrums.
Homestake vs Bullion
More of the same! Yet another powerful confirmation that the shares are leading bullion into a new bull market.
The pictures are obvious. It does not take a genius to see the powerful evidence that gold stocks have been outperforming bullion since the beginning of the year and that they are on the verge of superior performance to US equities.
It is a classic error to over emphasise the role of the gold price as the driving force in the gold market. All the myopic critics of the gold market had better be careful as their focus on bullion is totally misplaced. The shares are clearly showing which way the next trend in both gold bullion and share prices are going to move.
This data further indicates that all is not well in the US economy as gold only outperforms the Dow when real economic trouble is brewing. Forget the inflation dependence picture for gold, it also reacts to a flight from paper! The gold critics may have written off gold bullion but the shares are showing who is the real boss.
Gold Market Availability
For the past few months I have been engaged on a massive research investigation into every gold share, index and mutual fund in the world. I have examined the data for over 2500 gold and resource shares and mutual funds. I must conclude that the gold equity market is the tightest held segment of any major globally traded entity.
In the table the value of the total amount of gold ever produced is compared to the value of estimated ore reserves and value of gold held by central banks. In a nutshell the total amount of gold ever mined amounts to a value at $270 per ounce of $ 1217 billion.
| | Au oz
billion | $ value
billion |
| Total Mined Gold | 4.508 | 1217 |
| Estimated Ore Reserves | 3.430 | 926 |
| Central Bank Gold | 1.120 | 302 |
Dr J.R.F Handley determined the estimated ore reserves in his doctoral thesis in 1999. Central bank holdings are included for comparison. When it is realised that the market capitalisation of General Electric is $490 billion the amount of gold held by central banks is rather small.
My analysis of the market capitalisation of all the world's gold shares comes out at $35.3 billion. This includes analysis of over 2000 development and exploration companies.
| Market Capitalisation |
| | | $ billions |
| Canada | | 14.7 | |
| US | | 8.2 | |
| South Africa | | 7.2 | |
| Australia | | 3.0 | |
| Gold Producers | | | 33.1 |
| Exploration | | | 2.2 |
| Total Market Cap | | | 35.3 |
I estimate that all the world's unit trust and mutual funds specialising in gold or resources hold some $5 billion of these stocks. This drops available investment down to around $30 billion. Most of the leading gold producers, especially the South Africans, have large blocks of stock owned by mining holding companies. I estimate that another 15% of the total can be deducted as that held by the mining groups. This leaves about $24 billion as the total available value of gold shares in which to invest.
Compare this to the market capitalisation of General Electric and you will quickly realise that the gold share market is extremely tight. A minor run into a bull market will trigger an explosion in the prices of the leading gold shares. A significant decision by three large fund managers to place just 0.5% of their portfolios into gold shares could lead to a runaway market.
Forget the gold price ……….. watch gold stocks!!
Dr Clive Roffey
Johannesburg
May 15th 2001
Editor's Note: Dr. Clive Roffey is South Africa's
leading Technical Analyst, whose forte is gold mining stocks.
Printer Friendly Version
Email this Article