Gold Bull Market for Investors

This is a follow up to my last week's buy signal on the gold sector. If that buy signal succeeds, we are at the beginning of phase two of this generational bull market in gold and gold stocks. Many readers of my articles are passive investors, not into "market timing" for various reasons. Good news is, you don't have to trade in and out of the markets to get a better return, you simply find a major trend in the markets and ride that trend till it is over. Those who missed the phase one of the gold bull market, have now a second chance to participate, as following charts will show you.

The first chart is a performance ratio between gold and the commodity index. The time to own gold is when gold outperforms other assets, and since gold is a "thing", it must outperform other "things". The CRB index is an index of things, and the underperformance by gold in relation to CRB ended in late 2000. After peaking in late 2003, the ratio corrected in 2004 and 2005, and now has broken out of the correction, onto phase two of gold's dominance over other things. For commodity investors, gold is now a better thing to own over other things.

But gold's phase one was dwarfed by the performance of crude oil, and in order to overcome that, we must see a breakout in the performance ratio between gold and oil. It looks very promising currently, and upon a breakout, we should see gradual speculative money flow coming out of oil and into gold. For commodity investors, gold should be a better investment than oil upon a breakout.

If gold is at the beginning of phase two, by outperforming other things, then paper gold must also begin to outperform other paper assets. Gold stocks as represented by the XAU index, outperformed the SP500 from 2001 to 2003, and then spent 2004 and 2005 in a correction by underperforming the SP500. The correction has now ended with a breakout, and phase two here we go. For equity investors, it is now time to overweigh in mining stocks over growth stocks.

Since bonds is a much bigger market than equities, paper gold must also outperform bonds in a true bull market. Like previous chart, gold's paper assets outperformed bonds for three year before spending the next two in a correction, and that correction also appears to be over with a breakout. From a technical perspective, we are clearly into phase two of the gold bull market. For equity investors, it is now time to overweigh mining stocks over bonds.

Summary

From all technical indications, we are now into phase two of the gold bull market. Conservative investors can easily take advantage of this by rotating some of their current assets into gold and gold related assets. Aggressive investors should overweigh their holdings in the gold and mining sector. By participating in this phase two of the gold bull market, even passive investors can look forward to above average returns in the next few years.

Jack Chan at www.traderscorporation.com

16 November 2005