Who Would Have Thought?

In articles in the mainstream financial press and in mainstream market analysis published over the course of this year, a few things really stood out. Among those were a) stocks are the best thing since sliced bread and can only go higher, and b) gold is “tarnished” and can only go down.

This makes the 2014 to date score card quite astonishing, even though the action over just the past few trading days bears some responsibility for it. Here it is (Dec. 31 2013 prices compared to closing prices as of Monday October 13).

SPX:            + 1.43%

COMPQ:    +0.89%

DJIA:         – 1.54%

NYA:          – 2.25%

RUT:          – 9.8%

Gold:         + 2.91%

Of course these differences are so small (with the exception of the dismal showing of the Russell index) that they don’t really matter – in a few days time, things may well look different again, but as of Monday gold is ahead year-to-date. Obviously, it is not the performance gap as such that makes this interesting. Rather, it is that this outcome was accompanied by a steady drumbeat of bullish pronouncements on the stock market and the exact opposite with respect to gold.

Gold is the one asset Wall Street loves to hate, as evidenced by by the flood of almost gleeful headlines and articles in the financial press whenever the metal declines. Never mind that since the tech mania flamed out in April of 2000 – more than 14 years ago – the scorecard actually looks like this:

SPX + 20.7%

Gold + 359%.

Even though we have not included the S&P’s paltry dividends, which asset class would you have rather owned over this time period? Of course there is a time for everything, and one can cherry-pick one’s time periods to support just about any argument. Gold’s long term performance is actually nothing to sneeze at though, in spite of the intervening 1980-2000 bear market. For instance, if one looks at how gold has performed since 1971, its 3,535% return since then certainly doesn’t look particularly bad.

Moreover, even after having been in a vicious bear market since late 2011, gold obviously still beats stocks by a huge margin since it made its low in 1999/2000.

Gold daily – this is not a very inspiring chart this year to be sure, but it is actually outperforming the stock market in 2014 – click to enlarge.

Gold In Non-Dollar Currencies

We obviously don’t know yet if the recent low in gold will hold. Be that as it may, a warning that at least a near term low in gold could be close at hand was contained in a recent Bloomberg article, which was published on the very day the low was put in (“Option traders betting on more pain for gold prices”):

“Investors are betting that the worst isn’t over for gold after prices erased this year’s gains. The most-traded bullion option on the Comex in New York today was a put giving owners the right to sell futures for December delivery at $1,100 an ounce, a wager that would mean an almost 8 percent drop from current prices.

[…]

An estimated 5,973 lots of the $1,100 December gold put changed hands today, according to the latest data from the bourse. Each contract is for 100 ounces.

[…]

Today’s options trading signals that “there’s a large bet that prices will go lower,” George Gero, a New York-based precious-metals strategist at RBC Capital Markets LLC, said in a telephone interview. “The puts are like a magnet drawing prices down to that area.”

Maybe these options aren’t such a great “magnet” after all, since gold has added $40 since the day this big trade in puts was put on. What the metals strategist apparently forgot to consider: options involve not only buyers, but also sellers. Which side actually knows more about the market’s future performance is only ever revealed in hindsight, but on average, option writers tend to be “smarter” than buyers.

If one looks at the chart of gold in dollars, the possibility that the recent low will be undercut at some point can certainly not be dismissed out of hand. However, as we have previously pointed out, this doesn’t have to happen. In fact, when a market fails to break down from a descending triangle, it can sometime rally quite strongly – e.g. gold’s 1999-2000 lows were also made in the form of a descending triangle, and bearish sentiment was similarly thick at the time as it is today. However, people holding gold in euro or yen actually haven’t seen any noteworthy weakness this year:

Gold in euro and yen terms – not much progress, but also no continuation of the bear market in 2014 – click to enlarge.

The reason why we are bringing this up is that per experience, the performance of gold in major non-dollar currencies is sometimes a pointer with respect to the validity of turning points. Sometimes rallies and declines are led by the gold price in foreign currency terms, and peaks and/or lows that are no “confirmed” in foreign currency terms often turn out to be important. Note that especially gold in euro doesn’t look bad – in fact, it wouldn’t take much for it to break out to the upside.

Conclusion:

Gold has done a lot better relative to stocks this year than one would expect based on the press both have been getting. Meanwhile, in euro and yen it is impossible to claim that the bear market continued this year or that the charts look particularly bad. This divergence may well turn out to be meaningful.

Charts by: StockCharts