Let’s be honest – when it comes to investing, every once in awhile we (OK, for the record, in this case when I say “we”, I mean “me”, followed by me projecting my own foibles onto you – thanks for understanding) feel the urge to do something “rash.”
When I say “rash”, I am talking about looking at some potential “investment” (when I say “investment” I basically mean “potentially incredibly foolish speculation”) and staring head turned upward at the riches beyond the dreams of Avarice that we perceive to be awaiting us at the top of the mountain, all the while blissfully unaware of the potential sink hole forming around our feet.
"Hi, my name is Jay and I am a gold stocksaholic.”
The Good News and the Potentially Very Good (or Very Bad) News
Last week I wrote an article about moving averages and trend following (http://www.optionetics.com/market/articles/2013/04/16/kaeppels-corner-moving-averages-i-have-known-and-loved). Fortunately my respect for “the trend” has kept me from foolishly plunging headlong into gold stocks as they have utterly collapsed in 2013. I have written on a number of occasions in the past about a simple measure I started using in the mid-1980’s (also known as “The Hair Era” in my life) that simply divides Barron’s Gold Mining Index (BGMI) by the price of gold bullion. The theory is that as the ratio goes lower gold stocks are “cheaper” and a potentially good buy. And historically this measure has proven to be extremely useful – until this time around. See Figures 1 and 2.
Figure 1 – Gold Stocks (BGMI) versus Gold Bullion
Figure 2 – The K-Ratio – i.e., the Ratio of Gold Stocks (BGMI) divided by Gold Bullion
The top clip displays the action of gold stocks (BGMI) versus gold bullion. As you can see, gold stocks tend to swoop and soar in relation to movements in the metal. Gold stock prices have collapsed 56% since April 2011. In the bottom clip we can see that gold stocks have never been “cheaper” relative to the price of gold. So are they presently “a buy?”
Well, maybe soon. Allow me to explain.
When it comes to gold and gold stocks I look at trend, the K-Ratio and seasonal trends. If two or more of these line up then gold stocks may be a buy (or something to avoid altogether if the indicators are bearish). Presently the trend is obviously bearish and the K-Ratio is obviously (in theory anyway) bullish. So it comes down to seasonality.
Relevant Seasonal Trends in Gold Stocks
To put it as succinctly as possible, when it comes to gold stocks in April and May, you could do worse than to rely on this simple formula:
Well, not always of course, but for some perspective, see Figure 3.
Figure 3 – Growth of $1,000 invested in Fidelity Select Gold (FSAGX) only during April (blue line) or only during May (red line) since 1989
As you can see, gold stocks have gotten hammered during the month of May during some years (including each of the last three) so there is no guarantee of an “up” May. Still, May has been the best performing month since 1989, with a total net gain of +93% even after three straight down May’s between 2010 and 2012.
We also see in Figure 3 that April has been a disaster for gold stocks over the years. $1,000 invested in FSAGX only during April since 1989 would now be worth $395, or -60.5%. Ouch. This little nugget has been a factor in keeping me out of gold stocks. But with the month of May approaching I am starting to, well, I almost hate to say it but – stare up the mountain. For if gold stocks do bounce back chances are they will do so in very robust fashion.
Figure 4 displays the growth of $1,000 invested in FSAGX only during the last two trading days of April and the first four trading days of May since 1989.
Figure 4 – Growth of $1,000 invested in FSAGX during last two trading days o April and first four trading days of May (1989-2012)
As you can see, the last few years remind us that that are no “sure things”. Still, the overall trend has been fairly constructive.
Finally, for the hard core “seasonalaholic” (“Hi, my name is Jay”), Figure 5 displays the results of investing in FSAGX during the last two trading days of April plus May Trading Days 1, 2, 3, 4, 7, 8, 12, 13, 14, 15, 19 and 20.
Figure 5 – Growth of $1,000 invested in FSAGX only during seasonally favorable April/May trading days (1989-2012)
One Important Caveat
While I use FSAGX for testing purposes, the fact is that Fidelity will not allow you to trade in and out as often as might be suggested above. As an alternative investors can look at the ETF ticker GDX (Market Vectors Gold Miners ETF) or at Profunds mutual fund ticker PMPIX.
The trend in gold and especially in gold stock is unquestionably “down.” However, at the same time gold stocks just keep getting cheaper and cheaper relative to gold bullion, so it is not entirely wrong to expect that at some point buyers will come in and attempt to “pick up some bargains.” Finally, the (supposed) favorable seasonal April/May period begins for gold stocks at the close on Friday 4/26.
Will gold stocks rally sharply in May? It beats me.
Should you bet the ranch that they will? Do I really need to answer that question?
Might it make sense to allocate some reasonably small amount of capital to a highly speculative play in hopes of cashing in on a quick sharp profit? I can only speak for myself and for now I am done "talking" (when I say "talking", I mean "typing").
As always, time will tell.
Staff Writer and Trading Strategist
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