Gold & Stocks in 2017
Looking in the new 2017 Gold Outlook Report published by the World Gold Council, we read that in 2016 investors around the world returned in large numbers to the gold market, as a combination of macroeconomic drivers and pent up demand kept interest in gold high. But in the new year, there are some concerns that US dollar strength may limit gold’s appeal. The report provides some research information that lead to think that, on the contrary, not only will gold remain highly relevant as a strategic portfolio component, but also six major trends will support demand for gold throughout 2017 (1).
From a technical point of view, gold is still in a medium term bear market trend, started in 2011 with a fall from 09/09/11 top to the 04/12/15 bottom, of -45,54%. The two dotted red trend lines, show a potential downward-sloping right-angled triangle, a bearish pattern, but we must remember that one difficulty in interpreting these formations, is that many rectangles begin as right-angled triangles. Consequently, a great deal of caution should be used when evaluating these elusive patterns.
In 2016, for the first time from 2013, the Macd up crossed the zero line and the prices formed a low and then had enough strength to break a downtrend channel started in 2014 (see chart 2).
At the end of 2016, we had a higher low that touched the upper line of the downtrend channel. The Macd down crossed the zero line, but it is turning up again: something that happened also at the beginning of 2009. In the short term, this is an interesting information that can lead us to think that the price curve has regained some strength, but it is not enough. Prices must break out the 1400 level to have the completion of a possible broadening formation pattern.
Sometimes intermarket analysis provides us with more information, comparing one asset versus another in terms of correlation. From a previous article (2), we had evidence about the good decorrelation between Gold and Dollar Index. As we can see from the chart, the confirmation of the decorrelation between Gold and Dollar Index is present from the most part of the time, when the correlation indicator is in the red zone.
We read in many articles that Gold is a safe asset when we have price shock in the stock market. If this axiom is true, then we must have a very strong decorrelation between, for example, the Gold curve and the S&P 500 Index. But if we see the chart below, we notice that this is not always true, because we have a lot of situations (when the correlation index is green), that shows that the two assets have the same direction.
You can see in yellow background some of the periods where the correlation was high and the two assets had the same direction.
So, can a comparison between gold and stocks give us some extra information? One pattern that I found in my research, is given using the Gold vs S&P 500 ratio.
When this ratio starts to have a series of lower high with the low that forms a base creating a pattern of a descending triangle (which it is formed in a period of about one year), we have right after a fall of the S&P 500 Index. In this last months, we have a formation of a similar pattern, though this time, the two lows are spaced from the central body of the pattern.
(1) http://www.gold.org/research/gold-market-2017
(2) https://www.marketplus.ch/news/gold-at-the-dawn-of-a-new-presidential-cycle.html
Mario Valentino GUFFANTI CFTe – SAMT Vice President – Swiss Italian Chapter – mario.guffanti@samt-org.ch
Disclaimer: the above article is for general information and educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.