Just when everybody thought gold bullion was down and out and embarking on a downward spiral, the shine returned. Even erstwhile gold bug Richard Russell started favoring the Dow stocks over the yellow metal, but more about that later.
Since my last, somewhat upbeat, article on gold bullion and gold stocks about five weeks ago they have come out of hibernation with a vengeance, with gold metal up by 3.8% and gold stocks (as measured by the HUI Gold Bugs Index) by 8.5%.
One of my arguments at the time was that gold stocks, long-standing laggards at that stage, were starting to display relative outperformance against the gold price. The stocks have often in the past anticipated an imminent rise in the metal price and this time round turned out to be no exception.
The chart below illustrates the point, showing the HUI Index in the top section and the same index relative to the gold price in the bottom half.
Source: StockCharts.com
Gold bullion and gold stocks have a tendency to move off centre stage on occasion, but just as despondency sets in these powerful moves often take place. It is almost as if we need to remind ourselves of the following Spandau Ballet refrain every now and then: “… gold … you’re indestructible, always believe in, because you are gold.”
A strong rise in the gold price at this time of year should not come as a complete surprise as indicated by the graph below showing the average monthly rises/declines since the beginning of 1970.
It is evident in the graph that contrary to the pattern in the S&P 500 Index, May to September are historically quite good months for gold. The fundamental picture for gold is also shaping up quite favorably.
