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Monday, 11th September 2017

Gold Bull Market? Maybe Not Quite Yet Many commentators now say that gold has entered a new bull market. Has it? It's easy to argue both sides of this question. Gold has performed well recently and it is trading nicely above its 50 and 200 day moving averages, volume has been good and the speculators are getting long. All things you would like to see in a new bull market.


On the other hand, perhaps a lot of the buying is related to North Korea (these sorts of geopolitical tensions rarely serve gold well for long), the upward move in gold should perhaps have been stronger given the virtual collapse in the dollar, the gold stock rally has been feeble at best when these stocks should lead to the upside in a new bull market and the stock market itself has not corrected, which would provide important support for gold.

This last point may be the most important, at least in the big picture. We thing gold has to outperform general equities to establish a new gold market with confidence. Here is the weekly chart for the ratio of gold to the S&P 500 index for the past 20 years. An uptrend means gold is outperforming equities and a downtrend means the opposite. When gold indisputably entered a new bull market in 2001, this ration signalled it by moving sharply above the 200 week moving average, where it remained until gold fell into a bear market in late 2012.

Weekly chart for the ratio of gold to the S&P 500 index for the past 20 years

As Steve Saville points out, a bull market in gold is not simply a matter of gold going up in dollars. Perhaps it's just a falling dollar. Gold should also outperform alternative investments.

Below is a close up look at the current situation using a five year weekly chart. As you can see, we still do not have what we regard as a definitive signal of a gold bull market although it's certainly moving in the right direction.

Five-year chart for the ratio of gold to the S&P 500 index

However, the 20 year chart makes two other important points: (1) the relative valuation of gold to stocks is the best for gold since 2007; and (2) if you are looking to hedge against risk in the stock market, nothing beats gold.

As the 20 year chart also shows, once a new gold bull market begins, it moves fast and hard. Perhaps it would not be a mistake to begin putting that hedge in place now?