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Thursday, December 13th, 2018 - Buy Gold - Bringing you trusted gold news and gold investing information since 2006

Is the Gold Bull Market Over?

While large-cap equities had an abysmal decade of performance between 2000-2010 because of the internet boom and bust being following by the housing boom and bust, gold has done extremely well, advancing each year. Bull markets, of course, do not last forever. Often times, one can tell when a bull market may be nearing its end based on popular crowd sentiment. For example, back in the late ’90s, the world was full of people, from taxi drivers to stock analysts alike, who were talking about some hot internet stock they were “sure” was going to make big money. The same pattern followed the real estate boom, in which everyday people without the proper finances suddenly were making a boatload of money leveraging to buy a 2nd, 3rd, and 4th piece of property.

Reality TV shows such as “Flip This House” embodied popular sentiment at the time. The show came out in 2005, and was a hit. Interestingly, the show’s timing suggested the end was near for housing and real estate stocks. Take a look below at the price ratio of the S&P Homebuilding Index (XHB) to the S&P 500 (IVV).

As a reminder, a rising price ratio means that the numerator/Hombuilding Index is outperforming (up more/down less) the denominator/S&P 500.

click to enlarge images

Notice that the peak of the price ratio and outperformance happened in 2005, the same year the television show aired. And while history doesn’t exactly repeat, it often rhymes. A reality show titled “Gold Rush Alaska” has been on air as of just a few months ago, and follows six gold miners “in search of the American dream.” At the same time, more and more clients are asking about the best ways to hold gold because of fears over Europe, China, QE2, Aliens, Plagues, etc. etc.

And yet, if you look at the price ratio of gold itself to the S&P 500, the ratio appears to have peaked…in early 2009. Even more than that, weakness appears to be fully entrenched if you look at recent price ratio action. What this means is that there is an opportunity cost to holding gold over equities, such that equities could sustainably perform relatively better.

One final note. It’s been well documented that gold tends to do well in negative real rate environments, when inflation is higher than nominal interest rates. I ask my readers to question whether we are in a negative real rate environment now, given the increase in yields following QE2’s announcement, and given that nearly every other country but the U.S. is raising its own interest rate.

Disclosure: The author, Pension Partners, LLC, and/or its clients may hold positions in securities mentioned in this article at time of writing.

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