Even going back millennia, it has been shown trends persist when it comes to investing. The reason why is because there is one thing that has been constant throughout, humans and human behavior. While the vehicles in which to invest changed as have the markets themselves, human behavior perseveres. One of the most recent examples has been investors 8-year preference of investing in US stocks over gold. During that period, US stocks (using the Dow Jones Industrial index as a proxy) have outperformed gold by > 275%. In hindsight, it made no sense to be “diversified” in gold as it was nothing more than an anchor to your portfolio. Stick with those that are in an uptrend and outperforming. The DJI/gold ratio chart below provides additional data that things just may be a changin’ with respect to under-performance of the shiny metal.
Ratio charts are a useful tool to help identify potential changes in longer term trends in addition to finding relative strength.. The sooner you can identify and confirm a change in direction, the sooner you are on board a rising, profitable trend and why every investor should have this arrow in their quiver.
What makes the DJI/gold chart so interesting right now is that it peaked late last year and has since 1) broken its uptrend line and 2) formed 1-lower high and 2- lower lows. Both of these are required, at a minimum to confirm a trend change. If true (I would like to see the ratio create one more lower high before jumping on board), this is critically important as it potentially marks a huge change in where investors should commit their investment capital. Nothing moves in a straight line in either direction, but if true, be prepared for some gut checks along the way as the precious metals area are highly impacted by the FED’s decisions.