Nasdaq vs XAU
Eric Hommelberg, March 14, 2002
Also tired of watching your Gold shares being
hammered ?
How’s that possible you wonder, Gold shares should be moving in opposite
direction of the Nasdaq, shouldn’t they? But instead your Gold shares
are dropping even faster as the World Financial Markets. Your blood pressure
starts rising as fast as your Gold shares drop ! Especially after the S&P
warning that Gold stocks are dangerous, especially after Barron’s killed
Gold’s leading stock Royal Gold, why why why you constantly ask yourself.
Did we make the wrong bet after all (rise of POG) and should we pay more attention
to people such as Robert Prechter ? (Gold is going nowhere but down ?)
What can I say ? As a non financial expert I certainly can’t argue with
so called financial Guru’s as Prechter, all I do is studying the markets
and draw my own conclusions, share my views with others and learn from mistakes
of the past.
In this essay I just want to share some results of analyzing the XAU performance
vs the Nasdaq.
As I said before, many investors are getting frustrated by the fact hat their
Gold shares are going down sharply together with the Nasdaq although they expect
the opposite. It happened already several times the past 12 month.
I’m sure everyone remembers the 2002 July sell off in our precious Gold
shares very well. They came down together with the Nasdaq.
I’m sure everyone remembers the 2002 late September sell off in our precious
Gold shares very well. They came down together with the Nasdaq.
I’m absolutely sure that everyone will remember the 2003 February/March
sell off in our precious Gold shares forever ! Also this time the Gold shares
came down together with the Nasdaq.
So what about the argument that XAU should have an inverse correlation with
Nasdaq ? Although the examples shown above implies a direct correlation
between XAU/Nasdaq, the opposite is true.
Just look at the graph below:
As you can see XAU trend is up, Nasdaq trend is down ! Inverse correlation indeed.
Period ! (Please hammer this into your Brain!)
Feel better now ?
Although these graphs do tell not to worry, I still wasn’t satisfied about
the unpredictable sharp sell offs in Gold stocks which happened already three
times in the past 12 month. Analyzing the XAU/Nasdaq graphs showed some
amazing similarities which I want to share with you.
I will summarize the conclusions first, then take look at the graphs shown below
yourself.
- temporary Nasdaq bottoms occurs together with temporary XAU bottoms
- a sharp Nasdaq rally ignites a sharp XAU rally
- XAU rally equals or exceeds Nasdaq rally by several month
- Nasdaq melt down takes Gold shares with it. (last phase of bear-market rally
cycle, massive sell-off, high volatility (VIX approaching 50),
So are we due
for a sharp XAU rally which will last several month ?
Although critics will argue that the latest Nasdaq bottom projected above doesn’t
bounce from the base-support line (which would indicated a Nasdaq index of approx:
800), I don’t really care. First you should be aware that all other world
financial markets (non US) did indeed made new bottoms and that we’re
witnessing a sharp reversal right now. Besides that the volatility index which
reached a level of 41 on March 12 doesn’t rule out a sharp rally either.
Although the consensus is that a rally most likely will occur at VIX levels
in the 45 - 55 range, this time investors seems to be nervous not to miss
the next Gulf War rally based on Gulf War I memories.
On March 13 Nasdaq rose 4.8% , let’s assume this marks the start of a
new bear-market rally. We should expect then a sharp reversal of the XAU as
well.
Downward risk is extremely low:
XAU index approaches a stone-wall resistance at the low 60’s.
POG approaches stone-wall resistance at low $330.
So far, Gold stocks reacted as expected. The sharp Nasdaq reversal
on March13 (+4,8%), ignited the XAU as well. Gold stocks rose despite
the $11 drop in POG.
Enjoy the ride !
Comments are welcome at :
eric.hommelberg@goldminingguide.com
Best regards,
Eric Hommelberg
Gold Mining Guide
www.goldminingguide.com