LONGER-TERM TRENDS CONTINUE TO FAVOR GOLD ASSETS AND JAPAN
LONG-TERM TREND NOW FAVORS GOLD ... I've written articles about why I'm a long-term bull on gold, but I thought it worth revisiting as we approach the end of the year. Gold is also my favorite stock group for the coming year. Chart 1 is a ratio of gold bullion divided by the S&P 500 (using a log scale which is better for long-term comparisons). The ratio fell from 1980 to 2000 as stocks were the favored asset. The ratio bottomed in 2000, but didn't break the twenty-year down trendline until 2002 (see arrow). That means that for the first time in two decades, gold is now the favored asset instead of stocks. Since generational changes like the one seen here usually last for several years, I believe there's still a lot more upside in gold. The gold/S&P ratio is starting to strengthen again.
Chart 1
GOLD/S&P RATIO HITS THREE-YEAR HIGH ... Chart 2 shows the trend of the gold/S&P ratio since the start of 2003. The ratio peaked early that year as the S&P 500 started a cyclical uptrend which has lasted to the present. From the start of 2003 to the middle of 2005, the S&P did better than gold. To the far right, however, you can see that the ratio has now broken out to a new three-year high. That means either that gold is embarking on a new upleg or the bull run in the S&P 500 is ending (or both). Either way, gold-related assets are once again doing much better than the broader market. That includes gold stocks as well as bullion.
Chart 2
XAU HITS FOUR-YEAR HIGH ... The Gold & Silver (XAU) Index is trading today at a new nine-year high and appears headed to its 1996 peak over 150. The solid line beneath the chart is the XAU/S&P 500 ratio. The ratio bottomed near the end of 2000 and is nearing an upside breakout of its own. Gold stocks look like they have a lot further to go -- both on an absolute and a relative basis.
Chart 3
Chart 4
GOLD BUGS INDEX HOLDS BULLISH BREAKOUT... Chart 4 also paints a bullish picture for the AMEX Gold Bugs (HUI) Index. It was slower than the XAU to break through its late 2003 high, but it's holding the breakout. The weekly bars show that the HUI had been consolidating in a two-year trading range within a long-term uptrend (like the XAU). It broke through its earlier peak at 258.60 three weeks ago and is hitting a new multi-year high again today. That signals the start of a new upleg. The ratio below the chart is the HUI:GLD ratio. I showed it last week, but here it is again. After dropping from late 2003 to the spring of 2005, the ratio has turned up again (see arrow). As I also suggested recently, that's another bullish sign for gold stocks and bullion. That's because bullion usually does better when gold stocks are rising even faster, which is what they're doing now.
TOMORROW JAPAN ... I've stated recently that two of my favorite markets for 2006 are gold and Japan. Today's message dealt with gold. I'll show why I like Japan so much tomorrow. The Nikkei 225 rose 225 points last night (+1.4%) and was again the world's strongest stock market. The Nikkei is trading over 16,000 for the first time in five years and appears headed toward 20K. The Nikkei/S&P 500 ratio line is also trading at a five-year high. Not only is Japan the world's strongest developed market, it's also the cheapest. I'll show why tomorrow. I'll also explain again why I believe that the bull markets in gold and Japan are linked to each other.
Chart 5
