Last May, I made the argument that with looming uncertainty over the Brexit vote, buying the TSX index could potentially prove a more risk-free exposure to gold while providing significant upside. My rationale for this was that given the inherent volatility of gold prices, along with the fact that the TSX index had significant exposure to major gold producers, the index could potentially prove more profitable over the coming months.
Indeed, it has. Since May, the TSX has gained by 4.83% whereas gold gained 2.63% overall during this period and showed higher volatility.
I had previously pointed out that gold producers such as Barrick Gold (NYSE:ABX) and Goldcorp (NYSE:GG) were in a great position to profit from the recent spike in gold prices. Since May 12, Barrick Gold is up by 13 percent while Goldcorp has trailed more in tandem with the actual gold price returning just below 2 percent.
In this light, buying the TSX index as opposed to gold has proven profitable. However, with falling oil prices and a suspicion that the recent gold rally may be over, could this mean that the TSX index could also see a decline in growth?
Previously, the feedback from the Bank of Canada had been broadly positive, given that GDP had been growing by 0.9% in spite of lower oil prices. However, while the issue has been somewhat out of focus lately, Canadian household debt levels still remain a concern. Moreover, given the exposure of the TSX index to the financial sector, a sudden downturn in housing prices would likely be a source of short-term panic for the Canadian economy. Moreover, the Royal Bank of Canada (NYSE:RY) is down by 3.89 percent since May 12 while Toronto-Dominion Bank (NYSE:TD) is up by just 1.89 percent over the same period.
In this regard, should the environment in Canada change significantly (as in financial concerns over the property market and growing household debt come to the forefront), and gold prices start to retrace (with the same having declined by 3.06 percent since July 6), then we could well see a situation where the TSX index follows suit.
To conclude, while a long TSX index strategy has proven profitable given rising gold prices, there is a significant probability that lower oil prices, growing household debt concerns and a decline in gold prices themselves could place pressure on the TSX index. In this regard, I would not be long the index at this time.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.