I like to look at price spreads, particularly spreads between related assets.
When they become too wide, they point to a strong potential for mean reversion – and an opportunity for investors.
Today, we look at the spread between the Gold/Silver Miners Index (XAU) and gold prices.
As you can see in the chart, the spread between gold and the XAU is the widest in years.
When XAU (miners) is outperforming gold and the spread is wide (at each 1), the miners tend to underperform.
BUT when the miners are underperforming and the spread is wide (like it is now), there is strong potential for the miners to play catch-up. The last two times this took place at each (2), the miners did VERY well.
The XAU index is facing peaks that took place in 2013 and 2016 currently. Until these prior highs are taken out, they represent “heavy resistance!”
If the index succeeds in breaking out, a very nice rally could follow. It looks to be a good time to keep gold mining shares on your radar screen.