Which will perform better in the coming weeks or months? The price of Bitcoin (CRYPTO:BTC) or the price of Gold (NYSE:GOLD)? That should be a simple question. But other variables are now in focus. Think about silver. Is that more attractive? Or should you buy the S&P 500? These questions often arise when you have a positive view on the development of an asset class (like precious metals) but find it challenging to decide in favor of one or the other.
If you’re looking for a simple way to analyze everything, consider a simple lesson in technical analysis. You might find that “Relative Strength” can be your secret weapon.
What to Consider with Relative Strength?
If the gold price gained +20% in the period you are looking at, but the silver price only gained +10%, then the gold price was relatively stronger. However, relative strength also works when the price is negative.
Let’s say that the gold price lost -15% in value during a specific period. However, the silver price only lost -10%, then the silver price was relatively stronger (or the gold price was relatively weaker).
If you compare two price trends, it is often not possible to tell which of the two is currently ahead. Then an instrument of the technical analysis must help out: The spread in percent.
With this method, the initial value is divided by the comparison value and then multiplied by 100. So, for example, bitcoin divided by gold price x 100. As you will see in a moment, this method has a serious advantage. The spread tends to form trends, which you can then determine exactly using trend lines.
Which is Stronger: Bitcoin or Gold?
Let’s take a look at this for the question “Bitcoin or gold?” As you can see, the spread had formed a resistance that was broken to the upside in October 2020.
From that point on, bitcoin had relatively outperformed gold. But the resulting uptrend in the spread was then attacked for the first time earlier this month and finally broken downward on May 10: Since then, the gold price has been ahead.
Gold or Silver?
Gold was recently ahead of bitcoin for ten straight days. But what will move relatively stronger in the coming weeks or months: silver or gold? Let’s take a look at the next chart.
In the upper part of the chart, it’s clear that gold has performed better than silver since the fall of 2019. The gold price rose, while the silver price moved sideways. In the crash of 2020, the yellow metal dropped significantly less.
A trend “change” occurred in mid-July 2020, shortly before the new record high in the gold price. From then on, the silver price showed more dynamic. In the chart comparison, however, you can see this only from the turn of the year.
This also applies to the rise in both precious metal prices since the end of March. You can see the now re-established relative strength of the gold price from the trend break in the spread. This clear visual is what makes the spread so valuable.
DAX or S&P 500?
Finally, let’s take a look at the spread for the DAX versus the S&P 500. Even though this is rather meaningless at the moment – because a more significant correction would be urgently needed in both indices:
Since the last interim low on October 30, 2020, the S&P 500, for example, has gained +31.1% at its peak but only completed setbacks of a maximum of -5.7%. On a closing price basis, it was even only -4.2%. Such an increase over 7 ½ months without a major correction is historically rather rare.
Here the advantage of the spread is particularly well comprehensible: In the upper part of the chart, you can hardly read the relative strength of one of the two indices.
Nevertheless, you can see that the S&P 500 has had the advantage again for almost two weeks. Therefore, the DAX is likely to lose more in a correction – if it comes than its US counterpart.
Suppose you have to decide for investment between 2 or 3 alternatives. In that case, the pure comparison of the price trends is often unsuitable for this: Depending on the selected time window, it is difficult to identify an advantage for one of the considered stocks.
Here, the technical analysis with the spread in percent offers you an excellent instrument. Since the spread also tends to form trends, these can be drawn quickly using trend lines. Trend breaks show you when a change in relative strength takes place.
For example, gold was preferable to bitcoin as of May 10, 2021. Compared to the silver price, the yellow metal has already had an advantage since the end of March. Gold is currently “shining” because of the strong popping inflation. But we can also see with technical analysis, the precious metal currently offers excellent prospects for success.