IT MAY BE TIME TO ROTATE FROM OIL TO GOLD -- 30-YEAR T-BOND YIELD IS JUMPING -- THAT'S BAD FOR HOUSING AND REAL ESTATE
GOLD IS BREAKING OUT ... With everyone talking about oil, the gold market is breaking out to the highest level in seventeen years while oil is starting to slip. I'm going to make a case here for moving some money out of the energy sector and into gold stocks. Charts 1 and 2 compare the price of crude oil and gold bullion. Since last December, crude has risen 70% while the price of gold has been flat. That has created a discrepancy between the two commodities which is now being corrected. As of today, bullion has moved above its late 2004 peak to hit the highest level in seventeen years. At the same time, an overbought crude oil market is struggling. That suggests that gold may be the better place to be right now. A more compelling case can be made by comparing the relative action of energy and gold stocks.
Chart 1
Chart 2
GOLD VERSUS OIL STOCKS ... Chart 3 is a relative strength ratio of the Gold & Silver (XAU) Index divided by the Energy Sector SPDR (XLE). From the end of 2000 to the end of 2003, the rising ratio meant that gold stocks did much better than energy. In the last two years, however, energy stocks have done much better than gold as reflected in the falling ratio line. The RSI oscillator along the bottom helps determine when the XAU/XLE ratio has reached overbought or oversold extremes. In late 2000, the ratio was in oversold territory under 30 which favored gold. At the end of 2003, the ratio moved into overbought territory over 70 which favored oil. The ratio has been in oversold territory for most of 2005 and is starting to rally. It appears on the verge of crossing over 50 for the first time in two years. That suggests the pendulum is moving back in favor of gold stocks. I'm not suggesting selling all of one's energy holdings. I am suggesting moving "some" money out of energy and into the gold sector.
Chart 3
BOND YIELDS MAY BE BOTTOMING... Yesterday I wrote that gold stocks were rallying on fear of rising inflation which was also pulling long-term rates higher. [Rising gold is an early inflation indicator which in time usually pulls bond yield higher and bond prices lower. Rising inflation is good for gold but bad for bonds]. Yesterday I showed a big jump in the benchmark 10-year T-note yield. Today I'm going to focus on the 30-year T-bond yield. The reason is that longer maturity bonds have been the strongest part of the yield curve. A second reason for focusing on the long bond is that its yield is threatening to cross over its 200-day moving average for the first time in more than a year (Chart 4). That could be signaling a significant shift in trend to the upside. A move above its August peak would also turn its intermediate trend higher for the first time this year. The level that the long bond yield is rallying from is also important. The reason why is shown on the monthly bars in Chart 5.
Chart 4
LONG BOND YIELD IS BOUNCING OFF 2003 LOW... Bond yields have been falling for more than two decades, which has been characterized by a continuing series of lower peaks and troughs. Chart 5 shows, however, that the 2005 trough in the 30-year T-Bond yield has occurred at the same level as the 2003 trough and could be the start of a "double bottom" formation. The TYX still has a long ways to go to confirm a new uptrend. But it's at a long-term chart point where a new uptrend could very well start. Another worrisome sign is coming from the 12-week Rate of Change (ROC) oscillator below the price bars. That momentum indicator has moved decisively above the zero line for the first time in a year. That also suggests upward pressure in long-term rates. It also suggests that bond prices will probably start to underperform stocks. Interest-sensitive groups like housing and real estate would be especially vulnerable in a climate of rising bond yields. Rising inflation would keep pressure on the Fed to keep raising short-term rates. That won't be good for the stock market.
Chart 5
HOUSING STOCKS CONTINUE TO WEAKEN ... I recently wrote about housing stocks being among the worst performers since the start of August. That poor performance can be seen in Chart 6. The PHLX Housing Index has failed a test of its 50-moving average and is starting to weaken again. The HGX/SPX ratio peaked at the start of August. The fact that housing stocks are underperforming is another hint that the market is discounting higher bond yields. REITs are also being hurt by the prospect of rising rates and are among the day's worst performers. Chart 7 shows the heavy-volume breakdown in Real Estate iShares during August and the subsequent low-volume rally attempt. The IYR is also meeting resistance around its 50-day average. Its relative strength ratio peaked during August. At the start of this message, I recommended rotating some funds out of energy and into gold. I'd also recommend some rotation out of the housing sector that could be hurt by rising inflation into gold stocks which benefit.
Chart 6
Chart 7
