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Alexander Daly
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Alexander Daly is a private investor focused on identifying undervalued equities in order to develop actionable investing ideas. Alexander primarily analyzes U.S. equities, with a secondary focus on international equities and forex. He is pursuing a degree in Economics from Central Connecticut... More
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  • A Developing Correlation Between Russia And Gold

    As gold rises, look to gain Russian exposure.

    As gold rises, Russia (RSX) looks increasingly attractive. The S&P (SPY) hovers around all-time highs, and this market has yet to experience a healthy correction of 10-12%. Rather, investors bought on the 6% decline in mid-June, and triggered the rise to current levels. Conversely, Russia experienced a 10% correction between the beginning of April, and the end of June, and is currently coming off those levels. These movements are shown over a one year period on the chart below.

    Gold Prices Have Been Trending with Russian Equities

    I've been looking closely at the relationship between the RSX, GLD, and the SPY. The healthy correction that we were anticipating for US markets did not come in April or May. Instead, exuberance flooded the markets in the form of massive outflows from emerging markets (EEM), specifically Russia. The bullish exuberance in US equities can be attributed to inflows of international and domestic investments bottlenecking into the US markets. Searching for solid yield, and positive returns, money has been flocking into US equities in increasing volume. Inflows into US equities have displayed a direct relationship with the heavy outflows in other asset categories, namely gold (GLD), where there is a telling trend developing.

    The chart below indicates a turn around in emerging markets, and indicates fundamental reasons to go long RSX at these levels.

    (click to enlarge)

    What's Driving the Correlation:

    1. Exodus From Gold And Emerging Markets Bottlenecking Into US Equities

    What immediately strikes me is how visually apparent the bottlenecking of US equity inflows, from gold and emerging markets outflows, appears on a 3yr chart. The point that I'm focused on, and the point that I believe marks the beginning of a trend that has left the RSX undervalued relative to the intrinsic value of the fund's holdings, is the point at which GLD breaks below the SPY in February '13. This is not an article focused on the technicals, but during the month of February, a bearish MACD crossover occurs that corroborates what I identify as the beginning of a new, corrective, and downwards trend.

    Simply stated, it was at this point that investors began a mass exodus from gold and emerging markets. Instead, these previously diversified investors - seeking high yield, growth opportunities, and positive returns - chose to invest in the only asset class that met these qualifications: US equities.

    2. Unison Outflows from Gold and Russia Responding to S&P Fluctuations

    Note the behavior of the RSX in relation to GLD; emerging markets are currently behaving like gold (i.e. inversely with the S&P), and both experienced a near 10% pop in the last month while the S&P seems to be losing momentum. This behavior indicates that investors see the RSX as a fund that will move to the upside when the S&P experiences a correction; RSX volumes have spiked when the S&P fell, and calmed as the S&P gained. The price of Gold has remained in lockstep with the RSX, since April '11, relative to directional price movement. The recent gains in gold represent an entry point into RSX.

    The relationship between Russian equities and the precious metal has become increasingly clear over the last month; observe the following chart (courtesy of bigcharts.com), which I believe evidentiates the proposed correlation between RSX and GLD.

    (click to enlarge)MA_E_RSX_GLD

    The RSX M.A. Envelope Creates the Price Channel for GLD

    This chart reflects a brilliant pattern of price behavior that I don't write off as an anomaly. As we move closer to the start of Fed tapering, and outflows from the U.S. markets accelerate, look for Russian exposure.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in RSX, EEM over the next 72 hours.

    Aug 12 8:22 AM | Link | Comment!
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