In early June, I posted about the return of a bull market in U.S. stocks here. Since then, while it has been tested a few times, the new bull market has held up very well indeed.
As of now, the S&P500 has closed above its crucial 200-day moving average 12 consecutive days. Since closing above its 200-day moving average for the first time on May 27, the index has closed below its 200-day moving average only twice, and never for more than one day. Additionally, the index’s 200-day moving average has shifted from flat to rising upward. These are the signs of a new bull market.
These facts do not mean that prices cannot fall from here. It just means that the weight of the evidence favors the bulls, not the bears.
Readers of this blog have also taken notice of my bullish posture on gold since February of this year here, and even earlier on Stillpoint’s Facebook page. The question arises, if stocks are in an uptrend, shouldn’t gold be in a downtrend? Aren’t these two capital assets inversely correlated?
The short answer is not always and definitely not now. There is no question that gold has continued its bull run. Here is the physical gold ETF (GLD) overlayed with its 200-day moving average.
This uptrend is unquestionably stronger than that in the S&P500. Here, gold has closed below its 200-day moving average only 4 days since mid-November 2019, and the slope of its 200-day moving average is obviously moving up.
Gold shows no signs of slowing down either. In fact, quite the opposite. This ETF was stuck in a range between 158 and 165 from early April until late June. Since then, however, prices have broken out to the upside. This is an undeniably strong trend.
It is true that gold can be an excellent asset to hold when stocks are weak. But there are times when gold and stocks move in parallel. Take a look at the total return performance of GLD and SPY, the most liquid ETF for the S&P500, over the past 15 years. GLD is in red, and SPY in blue.
Notice that from the chart’s inception (late 2004), both gold and stocks were in an uptrend and stayed that way until the Great Recession in 2008. In fact, these two ETFs had begun moving in unison by the spring of 2003. Again, after stocks bottomed in early 2009, both stocks and gold rallied until gold’s top in early 2011, after which gold prices plunged and stocks rallied for many years.
But shortly after selloff in stocks in late 2018, a different relationship emerged, and both gold and stocks rallied together until the COVID-19 selloff in February and March of this year. Now, these two ETFs appear to be rallying together anew.
What causes gold and stocks to rally at the same time? Fundamental factors related to inflation and the money supply likely provide the answer. There is no question that the U.S. Federal Reserve has acted to flood the markets with massive liquidity to shore up asset prices. Additionally, the U.S. federal government is running enormous deficits. Unlike financial assets like currency and securities, gold is both a real asset and has been a store of value for thousands of years. Factors like these can make gold look more attractive to investors than financial assets like paper money. In fact, since the U.S. abandoned the gold standard in 1971, gold has been in a multi-decade bull market, despite major corrections along the way, as between 2011 and 2018.
But you don’t even need to know why gold is performing so well to know that it is an asset that you might want to own. All you need to do is look at the chart and re-evaluate the chart on a periodic basis to ensure that the uptrend remains in effect. Needless to say, the portfolios of Stillpoint clients contain substantial weightings of stocks and gold.
N.B. Why are markets with rising prices called bull markets and markets with falling prices called bear markets? The answer lies in how each of these animals fights. Bulls thrust their horns upward to fight, while bears swat downward. Makes sense, doesn’t it?