[Chart Of The Week] Stocks Over Precious Metals For Another 20%

JC Parets
June 16, 2017

The debate that will always persist is the Stocks vs Gold question. Do we own gold? Do we own stocks? Do we own both? What percentage of our portfolio should be in precious metals? Do we own the physical or the ETF? Whether Gold is at new highs or new lows, the questions will keep coming. It's something that us as humans are driven to constantly. I've learned to embrace it. While I treat Gold and the S&P500 the same way I treat Cotton futures and the Egypt30 Stock Index, it's understandable why others don't.

So let's look at it. In which direction should we expect the next 20% - Gold or US Stocks? 

In order to best answer this question, I thought it would add value to stretch this question a bit further and use more extreme examples of these asset classes. Fear and greed drive these markets so let's look to where the fear and greed can be seen the most dramatically. For US Stocks, we'll use the Small-cap Russell2000, which contains a basket of much more speculative names than the large-cap S&P500 or Dow Jones Industrial Average. To represent the precious metals space, Silver is really the one we want to watch. While Gold was hitting new 6-month highs earlier this month, Silver was no where near its highs, which was evidence of risk aversion for metals, not risk appetite. Silver is where the crazies live. We want to know what they're doing.

Here is the Russell2000 ETF $IWM vs the Silver ETF $SLV. Since the 2011 lows when US Stocks bottomed after a 20 plus % correction and Metals peaked, this ratio has exploded higher. The Russell2000 is up 130% while Silver is down almost 70% during this period. Talk about trends....

IWM-SLV

The question is simple: In which direction should we expect the next 20% to go? 

Well, based on the weight of the evidence, the trend here is clearly higher. This is not up for debate. The line literally goes from the lower left to the upper right. I would expect this 2 year consolidation since the 2015 highs to resolve higher. Remember digestions of gains tend to resolve in the direction of the primary trend. If we are above the 2015 highs in this ratio, we want to be pressing longs in US Stocks, particularly against short positions in Precious Metals.

I think the next 20% here is higher....

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Cheers,

JC

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