Without getting into the numbers right away, we are getting closer to a full on buy situation in gold and precious metal shares. In fact, depending on your own portfolio construction, trading prowess, trading funds, risk taking willingness, etc. purchasing or building some small positions in gold stocks could be warranted at this juncture. For myself, I would prefer a sign of strength in either (or both) gold/GLD and the Gold Miner indexes to commit funds. This leaves me on the sidelines for the time being.
That said, we are likely to see some interesting dynamics in the weeks ahead. First off, non-seasonally adjusted money supply increased a whopping 1% for the most recently reported week. This may not seem that much but increases of 1% or more have occurred in only 8% of the weekly money supply figures since the 1980's. This, all else equal, makes gold and precious metal stocks more appealing.
More interesting is the increase in the Federal Reserve's balance sheet, up more than 4% on the week. Now before I discuss the Fed's balance sheet I should note that the database I use only goes back 5-years. Although the database only covers five-years, it encompasses the most important years in my opinion. Namely the QE years where the Fed has expanded its balance significantly. Looking back over these five years, the Fed's balance sheet has expanded by more than 2% in only 10% of the weeks examined. And yes, the 2% break point is arbitrary but by making the break point greater than 2% creates very small samples in which the subsequent data is skewed significantly by QE1 and QE2.
What I found is that following significant increases in the Fed's balance sheet there appears to be a resulting boost in money supply growth, as one would expect. However, this increase occurs with a lag and reaches a maximum in or around three months following the the initial increase. This leads me to conclude that the significant increase of the Fed's balance sheet is likely to lead to an accelerated rise in money supply in the weeks and months ahead. This analysis does not factor in the potential for further Fed balance sheet increases with QE to infinity, which may add up to $85 billion monthly. This adds a dynamic not seen in prior periods, but will likely add to money supply growth.
All in all, the expected increase in money supply should make gold stocks more attractive. However and per my modelling convention, I only look out two weeks from the reported money supply figures. Any more and the timing models I employ will need incorporate all sorts of estimated data including the size the Fed balance sheet, lagged money supply estimates, gold prices, and gold stock index prices. Any increase in estimated data points would likely add forecasting errors to the model and make the insights garnered near worthless. I would much rather use actual data, but keep in my mind the dynamics of a changing investing landscape.
Now with all that said, the timing models improved on the week and continued their move into the buy zone.
3-month model
The three month model finished the week at a -1.45. This is the strongest of the measures I employ and suggests stronger than average future performance in gold stocks.
1-year model
The one-year model finished this week at a -0.66. Looking back at historical results, the average returns following occurrences similar to this week's results outpaced the average buy-and-hold return. However, the batting average is more or less inline with the average buy-and-hold case.
6-month model
The six month model was the weakest of the indicators at a -0.56, but in the buy zone. Similar to the one year model, the six month model's average return following similar historic occurrences outpaces the buy-and-hold. But also like the one-year model, the batting average is more inline with the buy-and-hold case. This comes with one caveat, the longer the time frame the better the results- both return and batting average. So to round the discussion back to my initial thought, committing small long-term funds to gold stocks is not out of the question, but I would not go firing it all of now. I would either wait for better model result (be it from money supply growth, lower gold prices, or some combination there in) or a sign of strength in gold/gold stocks.
That said, we are likely to see some interesting dynamics in the weeks ahead. First off, non-seasonally adjusted money supply increased a whopping 1% for the most recently reported week. This may not seem that much but increases of 1% or more have occurred in only 8% of the weekly money supply figures since the 1980's. This, all else equal, makes gold and precious metal stocks more appealing.
More interesting is the increase in the Federal Reserve's balance sheet, up more than 4% on the week. Now before I discuss the Fed's balance sheet I should note that the database I use only goes back 5-years. Although the database only covers five-years, it encompasses the most important years in my opinion. Namely the QE years where the Fed has expanded its balance significantly. Looking back over these five years, the Fed's balance sheet has expanded by more than 2% in only 10% of the weeks examined. And yes, the 2% break point is arbitrary but by making the break point greater than 2% creates very small samples in which the subsequent data is skewed significantly by QE1 and QE2.
What I found is that following significant increases in the Fed's balance sheet there appears to be a resulting boost in money supply growth, as one would expect. However, this increase occurs with a lag and reaches a maximum in or around three months following the the initial increase. This leads me to conclude that the significant increase of the Fed's balance sheet is likely to lead to an accelerated rise in money supply in the weeks and months ahead. This analysis does not factor in the potential for further Fed balance sheet increases with QE to infinity, which may add up to $85 billion monthly. This adds a dynamic not seen in prior periods, but will likely add to money supply growth.
All in all, the expected increase in money supply should make gold stocks more attractive. However and per my modelling convention, I only look out two weeks from the reported money supply figures. Any more and the timing models I employ will need incorporate all sorts of estimated data including the size the Fed balance sheet, lagged money supply estimates, gold prices, and gold stock index prices. Any increase in estimated data points would likely add forecasting errors to the model and make the insights garnered near worthless. I would much rather use actual data, but keep in my mind the dynamics of a changing investing landscape.
Now with all that said, the timing models improved on the week and continued their move into the buy zone.
3-month model
The three month model finished the week at a -1.45. This is the strongest of the measures I employ and suggests stronger than average future performance in gold stocks.
1-year model
The one-year model finished this week at a -0.66. Looking back at historical results, the average returns following occurrences similar to this week's results outpaced the average buy-and-hold return. However, the batting average is more or less inline with the average buy-and-hold case.
6-month model
The six month model was the weakest of the indicators at a -0.56, but in the buy zone. Similar to the one year model, the six month model's average return following similar historic occurrences outpaces the buy-and-hold. But also like the one-year model, the batting average is more inline with the buy-and-hold case. This comes with one caveat, the longer the time frame the better the results- both return and batting average. So to round the discussion back to my initial thought, committing small long-term funds to gold stocks is not out of the question, but I would not go firing it all of now. I would either wait for better model result (be it from money supply growth, lower gold prices, or some combination there in) or a sign of strength in gold/gold stocks.
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