Gold stocks need very specific conditions in order to perform well. The last time most of these conditions were present was during the Great Depression. However, conditions are currently shaping up to be even more ideal.
The performance of the Dow is one example of conditions that heavily influences how gold stocks fair.Historically, gold stocks had some of the best rallies after significant Dow peaks. This was true for the 1929 and 1973 major Dow peaks.
Given the above, I would make sense to say that the 2015 Dow peak is an important signal for significantly higher gold stock prices over the coming years. Below, is a long-term chart of the Barron’s Gold Mining Index (BGMI) that illustrates some of the conditions ideal for a gold stocks rally:
Gold Stocks Long-Term Chart Analysis
On the chart, I have marked two patterns from 1 to 4, by highlighting certain significant financial events. Point 1 on both patterns is the turnaround point for interest rates. On the older pattern, it was the point where interest rates started to increase, whereas on the newer pattern it was a point where interest rates started to decrease.
Point 2 on both patterns is the final Dow bottom just before a major rally, or a point where the Dow broke out. Notice how gold stocks started a fake rally (from around point 2) in both cases. They started a rally, promising a new bull market, but soon they diverge from the general stock market (which continued on a long-term rally).
Point 3 on both charts is the Dow/Gold ratio peak. This represents a signal that the tide is “soon” turning, from favouring general stocks to favouring gold stocks.
Point 4 on both charts is the major peak for the Dow. After point 4, the “real” gold stocks rally starts. The recent rally of gold stocks is a confirmation of this. This rally will outperform the 1970s rally by a large margin, due to the more ideal conditions with regard to commodity prices, debt levels, the economy, etc. (more detail in my gold mining fractal analysis report) that are currently present.
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