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Gold prices and the stock market rally.

July 23rd, 2009 · Greg Atkinson · 6 Comments

Despite howls of  “it’s a sucker’s rally” from some market commentators, Australian stocks have gradually pushed up since bottoming out earlier in the year. While nobody can say for sure what will happen over the next few months a look at the gold price and some stock market charts can at least tell us what is happening now.

As I mentioned back in A technical look at ASX All Ordinaries Index the stock market can move sideways during the transition from one financial year to another, but afterwards a trend emerges. In that blog I suggested the next move would be up and that is what is happening at the moment.

The reason I made this call was because at the time economic indicators in Japan, the U.K and the U.S were showing that these economies had either bottomed out or were in the process of reaching a bottom. As I have mentioned in previous ramblings  stock markets look for the end of bad news not necessarily good news, and so we are basically seeing a rally because investors feel confident at present that the world’s financial markets are not going to meltdown.

The gold price is a good way to measure fear in the markets. When stocks tumble, property prices fall and the economic outlook looks bleak many investors head for the relative safety of gold. This means fear gives the gold price a nudge upwards and can artificially inflate the price of gold, so it is interesting therefore to have a look at how the ASX listed Exchange Traded Fund (ETF) GOLD is trading versus the movement of the ASX All Ordinaries Index.

ASX ETF GOLD versus All Ordinaries Index 6 Month Price Chart

asx-gold-vs-all-ords-jul-09

The chart above clearly shows that as stocks have risen since March, gold related investments (in $AUD) have been slipping backwards. In other words as investors become more confident about the future of the global economy the attraction of gold as a safe place to park money becomes less.

As I have outlined in a previous article I like to track the price of gold using the ETF GOLD as this closely tracks the gold price in Australian dollars and can be easily charted against other ASX listed stocks and indices.

At the beginning of April there seems to have been a lot of GOLD stocks traded and the price fell although I have been unable to find out what was behind this. Perhaps some investor(s) decided to take their profits and get out of gold before further prices falls?

A lot of people who talk up gold prefer to use  charts showing gold in USD dollars and this might be fine for those using U.S dollars to invest, but for Australian investors this does not take into account the strengthening Australian dollar. So it might look good to see gold in U.S. dollars terms rising but all of this gain (and more) can be wiped out by a strong Aussie dollar.

10 Year Gold Price Chart in U.S. Dollars (USD)

10-year-gold-price-chart-jul-09

The 10 year gold price chart clearly shows that  gold has been unable to rally past US$1000 an ounce despite North Korean sabre rattling, the swine flu, talk of another Great Depression and a media that often seems to just want to scare the pants off people.

What is really interesting about this chart is that you see that around $700 seems to be the price of gold when investors are not scared out of their wits. This was highlighted in 2008 when we had a stock market rally from around March to June and as stocks rose, the gold price fell to just over $700.

So far gold prices are holding up relatively well in USD terms, but as more investors start to sense that stocks are a good investment again the gold price will come down and my guess would be that it will tumble down near the $700 level.

Since production costs for gold are in the vicinity of $400 – $600 USD an ounce the efficient gold miners will still do okay with a lower gold price, but plenty of other gold diggers will struggle if prices fall significantly. Of course prices could fall well below $700 if people start selling off the vast amounts of investment gold sitting in vaults around the world.

Back in April I outlined in World stock markets rally: is the bear back in its cage? that I was becoming more confident about the outlook for the stock market because a number of economic indicators were showing signs of life and since then the situation has improved further.

If we look at a chart for the All Ordinaries for the last six months we can see that it has rallied around 30% since the low was reached in March.  Of course every time the market pulled back for some days the doom crowd became vocal again with their howls of “suckers rally” but the fact is the upward trend is still in place.

ASX All Ordinaries (XAO) 6 Month Price Chart

asx-all-ordinaries-6-month-chart-jul-09

Does the current stock market rally have legs? My guess is yes and that it has much further to run. Of course there will be daily and even weekly corrections as has happened already, but I see these as buying opportunities and not as a sign that market is about to tumble down to near 3000 again.

The next level I am looking for is around 4800 as this is where I first thought the stock market would bottom out at before Lehman Brothers failed.  My expectation is that tha ASX All Ords should be getting back up near that level over the next few months and if so, this will help a lot of people’s investment portfolios and superannuation funds look in much better shape.


6 responses so far ↓

  • 1 Gary // Jul 28, 2009 at 10:57 pm

    At least the rally looks strong at the moment. But maybe people will start taking profits soon?

  • 2 Anon // Sep 23, 2009 at 11:10 am

    Hey Greg, I am not particularly fond of gold either. Gold prices could rise higher, but I prefer to avoid buying things that are arguably in a bubble.

    Have a read of these:
    http://seekingalpha.com/instablog/164535-mike-stathis/12669-fool-s-gold-part-1

    http://seekingalpha.com/instablog/164535-mike-stathis/12670-fool-s-gold-part-2

  • 3 Greg Atkinson // Sep 23, 2009 at 5:31 pm

    Anon – thanks for the links. Very interesting. I am also very wary of people talking up gold, much of what they say seems more like a sales pitch than anything you could call analysis.

    By the way, I moved your comment over here since it was gold related.

  • 4 freestockimages // Apr 29, 2011 at 2:21 am

    Hey Greg, I am not particularly fond of gold either. Gold prices could rise higher, but I prefer to avoid buying things that are arguably in a bubble.
    I agree.

  • 5 Greg Atkinson // Apr 29, 2011 at 6:42 am

    What surprises me is that the Australian financial media generally talk about gold in US dollars and don’t bother to mention what it is doing in $AUD. Sure gold in $US is going up…but so is the Australian dollar, oil, wheat and just about anything else against the USD.

    The other issue with gold (and silver) is that it is hard for investors like us to stay ahead of the commodities traders etc. By the time they have started selling and we have time to react to that, the price for gold could have already slumped 10-20% or more.

    Having said that gold is having another good run of late. But then again so are US stocks. You can almost hear the rush as people try and get their money out of US dollars.

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