Preface: Explaining our market timing models
We maintain several market timing models, each with differing time horizons. The “
Ultimate Market Timing Model” is a long-term market timing model based on the research outlined in our post,
Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.
The
Trend Asset Allocation Model is an asset allocation model that applies trend-following principles based on the inputs of global stock and commodity prices. This model has a shorter time horizon and tends to turn over about 4-6 times a year. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can be found
here.
My inner trader uses a
trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don’t buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the email alerts is updated weekly
here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.
The latest signals of each model are as follows:
- Ultimate market timing model: Buy equities (Last changed from “sell” on 28-Jul-2023)
- Trend Model signal: Neutral (Last changed from “bullish” on 19-Jul-2024) [correction
- Trading model: Bullish (Last changed from “neutral” on 15-Oct-2024)
Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter at @humblestudent and on BlueSky at @humblestudent.bsky.social. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of those email alerts is shown here.
Subscribers can access the latest signal in real time here.
Why gold will beat stocks
Looking ahead to 2025, I am reiterating my bullish call on gold from a long-term viewpoint. The recent pullback represents a buying opportunity in the metal from an asset allocation perspective.
Going back to 1980, we can see several distinct gold bull-bear cycles. Gold topped out at 850 in early 1980 and began a bear market that bottomed in 1985. It traded sideways and made a second bottom in 1999 and broke out to new recovery highs in 2004 and topped in 2011. It subsequently broke out again at 2,100 in early 2024. More importantly, it is tracing out saucer-shaped multi-year bases against different regional equity indices. The gold/Dow ratio is the weakest owing to the strength of U.S. stocks, but it is nevertheless distinctive. The Gold/EAFE ratio (all ratios are in USD) is about to stage a relative breakout, and the gold/EM ratio has marginally broken out of a 12-year base.
These technical patterns argue for a bullish commitment to gold for 2025 and beyond for all investors in all major currencies from an asset allocation perspective.
A detailed technical picture
Here is another long-term technical reason to be bullish. Not only did gold prices stage upside breakouts in USD, but also in all major currencies. The accompanying chart shows long-term breakouts to all-time highs in selected currencies, and even in the Swiss Franc (CHF), which is considered to be a “hard” currency.
The bottom panel shows the silver/gold ratio as an indicator of speculation in precious metals. The last major gold peak was accompanied by a spike in this ratio, which is not in evidence today. Sentiment readings are not in place for a major gold top.
The accompanying chart shows a close-up of the recent corrective action in gold. The violation of the rising trend line in USD is concerning, but gold did not violate the rising trend line in most other currencies, except for CNY. Arguably, the recent spike in the silver/gold ratio in October was a sign for traders that sentiment had become overly frothy and a pullback was due. Nevertheless, the overall technical structure of price action remains bullish and the correction should be regarded as a buying opportunity.
The end of disinflation?
Gold is useful as a diversifier in a portfolio because it’s a hedge against unexpected inflation. Bloomberg columnist John Authers recently made the point that the latest October CPI report is showing signs that the disinflation trend is fading. Different measures of CPI are above the Fed’s 2% target and they may have stopped falling (see
Inflation Needs Subtlety Right Now. It’s Getting Trump). In particular, Authers observed, “Both core services excluding shelter (the Fed’s so-called supercore, which has been given much emphasis over the last couple of years) and shelter ticked up very slightly and remain above 4%”.
Authers went on to cite CPI diffusion analysis by TS Lombard’s Steven Blitz showing that the pace of disinflation has slowed and turned up.
As well, there may be signs that the pace of increase in average hourly earnings are accelerating.
Taken together, the data probably don’t justify another rate cut next month. However, the Fed has a dual mandate. The latest employment figures showed weakness, and so on balance the path of least resistance is to cut again, but only by 25 basis points. Further, there’s a general expectation in the market that another cut is coming, and it might be dangerous to disappoint those hopes when the post-election markets are already volatile.
Fed Chair Powell agreed with Auther’s assessment. He signaled in a
speech that the Fed may not need to cut rates at the December FOMC meeting: “We are moving policy over time to a more neutral setting…we will carefully assess incoming data, the evolving outlook, and the balance of risks.
The economy is not sending any signals that we need to be in a hurry to lower rates.” [Emphasis added]
All of these trends are in place even before Trump takes office and none of them are attributable to his policies. Trump’s program of raising tariffs, extending tax cuts, and his stated intention of interfering with the Fed’s conduct of monetary policy is inflationary (see my analysis
Revisiting the Trump Trade). Even as gold prices corrected, inflation expectations, as measured by the 5-year breakeven rate, have been rising.
Waiting for the bottom
Tactically, I am waiting for the gold correction to bottom. Here is what I am watching.
Jason Goepfert at SentimenTrader that gold has tended to bottom when it falls 2% below its 50 dma, which just happened now. Will history repeat?
Another way of spotting a possible corrective bottom is to monitor the technical conditions of gold mining stocks. Gold Miners (GDX) are in a clear corrective phase and their 14-day RSI is oversold. The gold miner-to-gold ratio is near the bottom of its historical range, but readings are not at levels seen at recent bottoms. In addition, I would watch for percentage bullish to decline into, or at least near, the oversold zone before becoming turning tactically bullish.
Lastly, keep an eye on the USD Index. The Dollar rallied in the wake of Trump’s victory to the top of a range that began in 2023 and technical conditions appear extended. If it were to be rejected at resistance, a decline would be a tailwind for gold prices as the two tend to be inversely correlated.
In conclusion, gold prices have staged multi-year breakouts in multiple currencies, indicating a long-term bullish outlook. In addition, gold is on the verge of staging relative breakouts against global equity markets that point to multi-year outperformance ahead. The macro outlook calls for a re-acceleration of inflation, which is also positive for gold. Investment-oriented accounts should be accumulating gold in anticipation of superior returns in the years ahead.
Equity trading outlook
Looking to the week ahead, my inner trader is giving the bull case the benefit of the doubt and he is staying in his long S&P 500 position. The S&P 500 formed a probable bearish island reversal (box) last Friday, though the sharp drop could be attributable to option expiry hedging flow, and the index reached its downside target Friday (dotted line). The market remains in an uptrend, with potential support at the solid blue rising trend line, with secondary support at the breakout level (grey support zone). My inner trader’s line in the sand is the rising trend line. A breach of the line would be a stop-loss signal.
The usual disclaimers apply to my trading positions.
I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account. Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.
Disclosure: Long SPXL
Although I am bullish on gold my enthusiasm is tempered by the introduction of bitcoin. If the reason to own gold is to avoid the confiscation of wealth either by a government or through inflation bitcoin provides the same benefit. Also, if a person were living in a hostile area (the communist block) it would be easier to move wealth in bitcoin in comparison to gold.
Perhaps Cam or another reader can share their thoughts why my reasoning is incorrect.
Can Bitcoin be debarred by governments? After all, BTC is in the digital domain and these domains that run trades in BTC may shut off such trades on BTC?
Gold bullion carries no such risks IMHO.
Cam – If Gold has bullish outlook in 2025, would you please also assess the Silver. Just curious if Silver will catch up with Gold.
Hi Cam- Is the trend model going from Bullish to Neutral on 11/18? The date reference on the last signal looks off, so want to be sure it’s not an error.
Cam- according to my records, you moved the trend model back to Bullish on Oct 5. When did you officially move it back to Neutral?