60-40 portfolios and gold’s coming breakout

Earlier this week, gold unexpectedly raced to an all-time high, breaching the $2,100 mark in the process.

The sudden acceleration was driven by expectations of the Fed cutting back on policy rates, weakness in the dollar, and news of a naval confrontation in the Red Sea.

Commentary regarding the surge in price during Monday's session can be found here.

However, the explosion to an intra-day record of $2,152.30 per ounce (~£1,703.80)  was relatively short-lived, and the yellow metal is now trading around the $2,050 – mark.

Year-to-date, it has gained 7.2% at the time of writing.

But is gold in a bull market? Is it in a secular bull market?

An interesting indicator

Jordan Roy-Bryne, CMT, MFTA, Editor of The Daily Gold discussed an interesting indicator to gauge whether gold has entered a secular bull market or not.

Although we have seen gold rising 5.7% in the previous three months, Roy-Bryne tries to establish whether the metal’s performance has truly broken out, i.e., versus other financial assets.

His analysis takes into consideration gold’s position against a time series of the returns earned on conventional 60-40 portfolios.

He describes the indicator as,

The graph above notes that the 60-40 portfolio returns are calculated from private user data.

Analysis

Although gold appears to have entered a bull market by having spiked to an all-time high, and now pushing $2,100 per ounce levels, the lower graph tells a somewhat different story.

This shows gold’s performance versus the 60-40 portfolio (i.e., 60% in equities and 40% allocation in bonds), and it is clear that gold has been charting lower lows against this standard investment strategy from 2016 to 2022.

Encouragingly, the indicator (i.e., the black line) has just begun to show the initial signs of having bottomed out and finding upward momentum in recent months.

In this magnified section of the graph focusing on 2023, gold’s performance against the conventional portfolio strategy has outperformed the 40-month moving average (i.e., the blue line), and was able to recently break out above the 80-month moving average (i.e., the magenta line) before dipping under it again.

Roy-Bryne argued,

What to expect

As mentioned above, Roy-Bryne notes that the black indicator line has broken past the 80-month moving average on a couple of occasions in the recent past.

On a technical basis, it seems that we could see a move higher here, and this may be an interesting data point for investors and traders to consider in their analysis.

At a more macro-level, Fed Chairman Powell’s comments casting doubt on the timing of rate cuts may complicate the picture for gold.

In addition, the dollar index (DXY) has come off recent lows and is now trading at a whisker away from 104.0.