Posted 8th November 2022

Is a Gold and Silver Rush About to Occur?

precious metals sector gold silver

Looking for value in the stock market takes different forms. 

In my opinion, the most diehard version involves seeking out stocks that trade below tangible book value (shareholder equity on the balance sheet), where the value of the asset’s net of intangibles minus liabilities exceeds the market cap of the company. 

Another flavour of “value” investing is to look for stocks in companies with good fundamentals that, for whatever reason, the majority of investors are selling or avoiding (contrarian investing). 

A third version is to look for relative value. 

gold xau s&p 500

The chart above shows the ratio of XAU to the S&P 500 since the beginning of 2001, which is when mining stocks bottomed within the bear market which started in 1980. This illustrates the value of the mining stock sector relative to the general stock market.

Currently, mining stocks were only better valued relative to the rest of the stock market, twice over the last 21 years:  at the beginning of 2016, after the vicious 4-and-a-half-year bear market that began in mid-2011, and in late 2018, when Fed monetary policy caused a big sell-off in financial assets.

Looking at the chart from a technical analysis perspective, the ratio is in an uptrend, which is potentially a bullish indicator for the sector. In 2016 the ratio reflected the fact that the general stock market was rising while the mining stock sector was declining.

In 2018 and at present, the drop in the ratio can be attributed to the fact that mining stocks have been declining on a percentage basis at a faster rate than the rest of the stock market. However, recently the ratio bounced from the trend line, indicating that mining stocks are starting to outperform the S&P 500.

In my opinion – and I do not have a specific time frame that I can offer – at some point the precious metals sector will re-enter a bull cycle and diverge positively from the rest of the stock market. This pattern has occurred intermittently over the last 21 years, most notably in the fourth quarter of 2008.

The catalyst for this could be any number of events. The most obvious would be the resumption of central bank money printing or Quantitative Easing. The action by the Bank of England in response to the pension crisis is perhaps a foreshadowing of this.

This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.