Nasdaq vs XAU
Eric HommelbergAlso tired of watching your Gold shares being hammered ?
How's that possible you wonder, Gold shares should be moving in opposite direction of the Nasdaq, shouldn't they ? But instead your Gold shares are dropping even faster as the World Financial Markets. Your blood pressure starts rising as fast as your Gold shares drop ! Especially after the S&P warning that Gold stocks are dangerous, especially after Barron's killed Gold's leading stock Royal Gold, why why why you constantly ask yourself. Did we make the wrong bet after all (rise of POG) and should we pay more attention to people such as Robert Prechter ? ("Gold is going nowhere but down").
What can I say ? As a non-financial expert I certainly can't argue with so called financial Guru's as Prechter. All I do is study the markets and draw my own conclusions, so that I may share my views with others, and learn from mistakes of the past.
In this article I just want to share some results of analyzing the XAU performance vs the Nasdaq.
As I said before, many investors are getting frustrated by the fact that their Gold shares are going down sharply together with the Nasdaq - even though they expected the opposite. It happened already several times the past 12 months.
I'm sure everyone remembers the 2002 July sell-off in our precious Gold equities very well. They came down together with the Nasdaq.
Furthermore, I'm sure everyone remembers the 2002 late September sell-off in our precious Gold equities very well. AGAIN, They fell concurrently with the Nasdaq.
Moreover, I'm absolutely certain that everyone also will most certainly remember the 2003 February/March sell-off in our precious Gold shares ! Likewise our Gold equities came down with the Nasdaq.
So what about the argument that XAU should have an inverse correlation with Nasdaq ? Although the examples above imply a direct correlation between XAU/Nasdaq, the opposite is true.
Just look at the graph below:
As you can see, XAU trend is up while Nasdaq heads down !
INDEED Inverse correlation. Period ! (This is worthy to commit to memory!)
Feel better now ?
Although these graphs suggest we should not worry, I was concerned about the unpredictable sharp sell-offs in Gold stocks which occurred three times in the past 12 months. Analyzing the XAU/Nasdaq graphs showed some amazing similarities which I want to share with you.
Once you have read my summary, then please take peek at the graphs shown below.
Summary of Conclusions
- Temporary Nasdaq bottoms are concurrent with temporary XAU bottoms
- A sharp Nasdaq rally initiates a sharp XAU rally
- XAU rallies equal or exceed Nasdaq rallies by several months
- Nasdaq melt downs will also fell Gold shares. (last phase of bear-market rally cycle, massive sell-off, high volatility (VIX approaching 50),
So are we due for a sharp XAU rally which will last several months?
That some critics argue that the latest Nasdaq bottom (projected above) did not in fact bounce off the base-support line (which would imply a Nasdaq index of approximately 800), really is not a material concern to me. Firstly, one should be aware that all other world financial markets (non-US) have indeed made new bear market bottoms. And secondly, we're witnessing a sharp reversal as I write. Additionally, the volatility index - which reached a level of 41 on March 12 - doesn't rule out a sharp rally either.
Although the consensus is that a rally most likely will occur at VIX levels in the 45 - 55 range, this time many investors seem to be anxious to not miss the next Gulf War rally based on Gulf War I memories (ie 1991).
On March 13 Nasdaq rose 4.8%. In this regard let's assume this marks the start of a new bear-market rally. Correspondingly, one should expect then a sharp upside reversal of the XAU.
Downward risk is extremely low:
- XAU index approaches a stone-wall resistance at the low 60's.
- POG approaches stone-wall resistance at low $330
So far, Gold stocks reacted as expected. The sharp Nasdaq reversal
on March 13 (+4,8%), ignited the XAU as well, while Gold stocks rose despite the $11 drop in POG.
Enjoy the ride!
Comments are welcome at:
Gold Mining Guide
15 March 2003
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