Yes, I should probably change the name of the blog to all gold stocks, all time. In any event, I found this analysis by John Hussman insightful.
I should note that last week, spot gold fell to 1486, and the Philadelphia gold index (XAU) declined to just 116, down nearly 50% from its 2011 peak. Importantly, this places the ratio of the spot gold price to the XAU at the highest level in history. This fact does not, in and of itself, imply near-term gains in the XAU. However, looking out over horizons of a year or more, an elevated gold/XAU ratio is a strong indicator of subsequent prospective total returns in gold shares. It’s notable that gold shares have been relatively flat – overall – for the most recent 4-year period, primarily because of the collapse that followed the Sornette bubble in gold itself. The performance of gold stocks has fallen significantly short of what would have been expected solely on the basis of the gold/XAU ratio. But it’s precisely that shortfall that creates such a major disparity today. Gold stocks are certainly volatile, so the prospective appreciation in gold shares should not be considered a low-risk outcome in either the short-term or the longer-term, and aggressive positions in gold shares often come with intolerable volatility. That said, we certainly view the present gold/XAU ratio over 12.5 as indicative of a significant margin for error – looking over a horizon of several years – even in the event of a further decline in the price of physical gold. Gold shares are among the only asset classes for which we can comfortably use the phrase “margin for error.”
I should note that last week, spot gold fell to 1486, and the Philadelphia gold index (XAU) declined to just 116, down nearly 50% from its 2011 peak. Importantly, this places the ratio of the spot gold price to the XAU at the highest level in history. This fact does not, in and of itself, imply near-term gains in the XAU. However, looking out over horizons of a year or more, an elevated gold/XAU ratio is a strong indicator of subsequent prospective total returns in gold shares. It’s notable that gold shares have been relatively flat – overall – for the most recent 4-year period, primarily because of the collapse that followed the Sornette bubble in gold itself. The performance of gold stocks has fallen significantly short of what would have been expected solely on the basis of the gold/XAU ratio. But it’s precisely that shortfall that creates such a major disparity today. Gold stocks are certainly volatile, so the prospective appreciation in gold shares should not be considered a low-risk outcome in either the short-term or the longer-term, and aggressive positions in gold shares often come with intolerable volatility. That said, we certainly view the present gold/XAU ratio over 12.5 as indicative of a significant margin for error – looking over a horizon of several years – even in the event of a further decline in the price of physical gold. Gold shares are among the only asset classes for which we can comfortably use the phrase “margin for error.”
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