It is not easy to play any asset cycle, gold included. The best recipe is to load up as many gold-related stocks as possible and wait till the cycle ends.
However, it is easier said than done. An investor playing the gold cycle is exposed to many doubts, psychological problems, cash flow issues etc. As a result, he / she jumps from one stock to another, listens to the noise made by Wall Street clowns and panics at short - term corrections. Simply put, loses part of the earned profits or even makes nothing at all...
For those "lost in the mist" I prepared this post.
So how to play this gold bull cycle without going mad?
Firstly - all financial cycles have a few phases. As for the gold cycle, in my opinion, the best way to find at what phase the cycle is, is to look at the behavior of the gold itself and gold - related stocks.
Let me take the Philadelphia gold and silver index ($XAU) as a benchmark of gold - related stocks.
Now, each gold cycle may be divided into three stages (phases):
1. at the beginning of the cycle it is XAU, which is stronger than gold itself
2. in the middle of the cycle both gold and XAU appreciate at the same pace; what is more, this stage is much longer than the stage 1
3. late cycle is indicated by gold being stronger than gold-related stocks; if you spot this phenomenon - start thinking about selling your stocks!
Now, let me show how the cycle worked before:
The chart shows the gold cycle, which started in late 2008 and ended in the beginning of 2016.
The three stages were as follows:
1. October 2008 - September 2009: it may be easily noticed that during that period XAU was stronger than gold (the area in orange on the lowest panel of the chart)
2. October 2009 - May 2011: both gold and XAU were appreciating at the same pace (look at the horizontal line in the green area on the lowest panel of the chart)
3. Since May 2011 XAU was relatively weaker than gold - astute investors should have been selling their stocks then
I think it is quite a simple way for any investor to stay disciplined during the current cycle. And how does the cycle look now?
Well, look at the chart below:
As the panel in the middle shows, now we are definitely in the first stage of the gold cycle. So, do not panic. There is plenty of time to get nervous.