JOHANNESBURG (Mineweb.com) -- For the first time in some two years, Myles Zyblock, RBC Capital Markets chief North American institutional strategist, has identified a buy indicator for gold stocks.
According to Zyblock, among numerous indicators monitored, the one with the best track record is one of the simplest: the ratio of the dollar gold spot price to the Philadelphia gold & silver index, known as the XAU.
According to Zyblock, when the ratio is above 5.0 – an event known for only 12% of the time in the past 22 years - the average annual one-year holding period return for stocks in the XAU has been 38.4%.
“Importantly,” says Zyblock, “there was only one instance when the gold-to-XAU ratio was above 5.0 that investors lost money over a one year horizon, and the actual loss was 12%. In other words, when the stocks are cheap relative to the underlying gold spot price (i.e., the ratio is above 5.0), it has almost always paid to buy precious metals shares.”
The 12 constituents of the XAU: Barrick, Agnico Eagle, AngloGold Ashanti, Gold Fields, Goldcorp, Glamis Gold, Harmony Gold, Kinross Gold, Meridian Gold, Newmont, Pan American Silver, and Placer Dome.
Zyblock says that when the ratio is below 3.0 - which has occurred 5% of the time in the past 22 years - gold stocks have returned -24.3% on average over a one-year horizon. “Moreover,” observes Zyblock, “there was never an episode when the ratio was below 3.0 where you earned a positive return from holding gold stocks.”
Zyblock’s bottom line: “The gold to XAU ratio indicator tells us to buy gold shares when it’s above 5.0, and to sell gold shares when it’s below 3.0 with a one-year holding period in mind. The ratio currently stands at 5.08. While one indicator is probably not enough to make a huge bet, this one sure provides compelling food for thought.”
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