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It is well known that financial markets are cyclical in nature, with investment capital flowing from gold and silver to "paper" assets and vice versa. Investors worldwide prefer to keep their funds in the form of precious metals when the state of an economy is poor: during crises, wars and defaults, when there is no trust in the stock market.
During conventional economic stability, investors prefer securities to precious metals and invest in the stock market. The USA is currently considered one of the largest holders of gold reserves among separate countries, and the American stock market is the largest in the world. Let us consider the interrelation between these markets. In order to understand the market of precious metals and discover its main differences from other popular instruments of global financial markets, we turn to the weekly chart of DJI - Dow Jones Industrial Average index, against a basket, composed of equal shares of gold and silver.
In order to create the chart, we use unique functional of NetTradeX Platform through application of GeWorko method. As we have seen previously, while analyzing stock indices and comparing portfolios conducting graphical analysis of markets with application of GeWorko Method gives us the full picture and deep historical data. This unique functional of NetTradeX platform serves as a powerful tool when it comes to comparison of assets, tracing their history, applying technical analysis, plotting charts and, finally, structuring effective asset portfolios.
On the platform the value of all assets in a portfolio is automatically converted into U.S. dollars, which makes it possible to determine the price of one portfolio against the other, automatically creating a new financial unit - a composite instrument PCI (Personal Composite Instrument).
In the following chart one portfolio includes the DJI index, and the second portfolio includes equal shares of gold and silver. Both portfolios have current value of 100 000 U.S. dollars each.
|Portfolio: DJI / Gold & Silver|
The chart shows the relationship between these two portfolios in a weekly time frame from 2006 up to the present time. In general, over the last 60 years, the overall trend remains slightly bullish (it is important to note that dividends are not taken into account here, real return denominated in gold and silver would have been higher in case they were). Generally highs and lows in this relationship coincide with reversion points of cyclical bullish and bearish markets. We can see that before another collapse of stock market in 2008, in the chart, created at the end of 2006 and mid-2007, there is a formation of double tops; afterwards, during several years a long, continuous decline was being observed.
New deep bottom was reached in the middle of 2011. It can be stated with high probability that at this point the bearish cycle was over, and currently we can see a reversal and the beginning of the next large cyclical market. It is noteworthy that this happens on the background of new highs of the DJI and a deep correction in the markets of gold and silver. On the chart there is a price pattern that is very similar to the well-known reversal model of technical analysis "inverse head and shoulders". In case if it is truly completed, then, following the possible correction in the US stock market, the relative growth of the Dow Jones against precious metals (gold and silver) may continue.
On the basis of this assumption, in case of focusing on the medium and long-term strategies, we can choose a convenient moment for buying American stocks or stock indexes against gold and silver.