Gold stocks have very favorable risk/reward based on Hussman's indicators.

John Hussman, whose weekly market comments are a must read, wrote a piece back in 1999 entitled Going For the Gold, see here.  In it he described the set of circumstances that are present during periods of gold stock strength.

There are 4 items that when are all present have historically resulted in an amazing 123% annualized return for the XAU gold stock index.

Those items are:

1) The rate of inflation is higher than 6 months earlier.

     Check:  3.57% vs. 1.14%  according to this website:

2) Treasury bond yields are lower than 6 months earlier

     Check:  30 yr 4.39% vs 4.55%  See here:

3) the NAPM Purchasing Managers Index is below 50,
    
     Not yet: currently at 55.3  See here:

and 4) the Gold/XAU ratio is above 4.0.

     Check:  currently 7.89  See here:

Three of the 4 items are present with the 4th being reasonably close and except for this past month in a downward trend.

John Hussman has taken an 18% long gold stock position out of a possible 30% in his bond fund. I own shares in his other two funds HSGFX and HSIEX, but not his bond fund.  I bought a few shares of HL and some HL calls as a speculative trade.

For more on Gold, the Federal Reserve, and the Austrian Business cycle see my recent post:
Big time trouble dead ahead thanks to the Federal Reserve.

1 comment:

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