The Adjusted Gold/XAU Ratio as an Indicator of Forward Returns for Gold Stocks – An Update
urrently the gold/XAU ratio is below the extension of the trend line. If the blue trend line is indeed an indicator for peaks in the ratio, then we can expect such a peak to occur soon. Extending the current trend of the adjusted ratio, as represented by the short green line, we can anticipate intersection with the blue line at a level of about 11.4, which would indicate the expected peak level of the gold/XAU ratio. An increase in the price of gold with XAU gaining relatively less – or, alternatively, a further decline of XAU with gold remaining at the current price – could lead to the anticipated peak level. Once the trend-adjusted ratio has formed a peak and starts to decline, one can reasonably expect good gains for gold stocks afterwards, as has always been the case in the past. Those prior examples are listed in Table 1.
Table 1
date when peak of adjusted gold/XAU occurred
|
level of XAU at peak of adjusted gold/XAU
|
date when XAU gained most after peak of adjusted gold/XAU
|
max XAU after peak of adjusted gold/XAU
|
%-gain
|
annualized rate of return
|
1/21/1980
|
105.24
|
10/1/1980
|
183.59
|
74%
|
122%
|
7/15/1982
|
52.8
|
1/5/1983
|
150.11
|
184%
|
795%
|
7/30/1986
|
60.04
|
9/9/1987
|
155.74
|
159%
|
136%
|
11/30/1992
|
65.81
|
1/6/1994
|
145.57
|
121%
|
106%
|
11/20/2000
|
42.17
|
3/5/2008
|
206.37
|
389%
|
24%
|
10/28/2008
|
72.72
|
3/30/2011
|
228.95
|
215%
|
61%
|
The recent gold/XAU ratio and historic returns for XAU
As mentioned in my October 2011 article, one could have, based on the then-prevailing gold/XAU ratio of about 8.30, expected significant gains for XAU over the subsequent eight months. That time has almost passed, and XAU has instead lost value since then.
In order for XAU to gain, the gold/XAU ratio would have had to get lower and stay below the criterion value of 8.30 during the remainder of the stipulated investment period, or the extended investment period, as explained in the original article. Since the ratio never fell below 8.30 and is now about 10.5, the investment period is not complete, and thus a final determination cannot be made on whether the investment strategy was successful or not.
But what performance can we expect from gold stocks in the near future? Looking back we see that there were only two other occasions when the adjusted ratio was as high as the current level, namely in 1980 and 2008. The returns that followed on those occasions when the adjusted ratio was 10.0 are shown in the table below.
Table 2
Historic XAU Returns for Criteria Value of Adjusted Gold/XAU = 10.0
and minimum investment period of 180 days |
||||||
Investment Period from - to
|
XAU value at start
$ |
XAU value at end
$ |
no. of months in each period
|
absolute return for each period
|
gain
(loss) over period $ |
|
1/3/80
|
10/6/80
|
79.5
|
178.0
|
9.1
|
123.8%
|
98.5
|
10/22/08
|
5/16/09
|
71.7
|
136.7
|
6.8
|
90.7%
|
65.0
|
4/11/12
|
-
|
164.3
|
-
|
-
|
-
|
-
|
If history repeats itself, then substantial returns await investors in gold equities – and they may be realized fairly soon.
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