The XAU is an index of gold and silver stocks. It has been hammered hard since the gold and silver peaks in 2011.
The XAU bottomed in November 2014 below 62 at a 14 year low, down approximately 73% from its 2011 high at approximately 230. As of Friday March 20 it closed at 69.27.
I suspect that most investors gave up – long ago – on gold, silver and their stocks. Good! The upcoming multi-year rally will be a surprise and should move the XAU index beyond the 2011 highs.
Examine the 25 year graph of the XAU. The chart has been rising slowly but is currently deeply over-sold.
The S&P 500 Index (not shown) has rallied to new highs, looks toppy, and has been levitated by “money printing” and low interest rates. Examine the graph of the ratio between the XAU and the S&P. The ratio is currently at lows last seen in 2000 and is near all-time lows. Gold and silver prices have been weak for four years and the XAU has been crushed further. Expect gold, silver, their stocks, and their ratio to the S&P to rally in 2015 and 2016.
Have gold stocks fallen in tandem with gold prices? No! Examine the chart of the XAU to Gold ratio. It peaked in 1996 and has fallen since then. Gold and silver stocks have been “out of favor” for nearly two decades. The ratio hit a low in November of last year and is still exceptionally weak. Expect a rally.
What about the US dollar? In spite of $18 Trillion in official US debt and no plan to reduce either the total debt or the annual deficits, the dollar has been in a parabolic rally since May of 2014. Examine the monthly chart and its overbought condition as shown by the RSI, MACD, and TDI. Many other indicators tell the same story. The dollar has rallied too far and too fast. We may have seen the high on Friday the 13th, but if not, the high will probably occur soon.
CONCLUSIONS:
Gold and silver have fallen hard since 2011 and gold and silver stocks have been crushed. The chart of the XAU shows a November low not seen since 2000. The ratios of the XAU to the S&P and to gold show that gold and silver stocks have been “out of favor” as easy money has levitated the broad stock market at the expense of gold and silver stocks. Those stocks should “regress to the mean” and move much higher. I suspect 2015 will clearly show the bottom occurred in 2014 for gold, silver and the XAU. The US dollar already has or will soon peak in 2015, which will add to the volatility and “tailwind” for gold, silver, and their stocks.
Gary Christenson
The Deviant Investor
About the author
