As Gold and gold mining stocks approach strong resistance, we wonder if the
outcome will be a sharp selloff or a period of bullish consolidation. While
there are a handful of things we can examine (sentiment, momentum, relative
strength, etc), today we will focus on Gold and its relative strength against
two key markets. How Gold fares against Bonds and foreign currencies in the
weeks ahead could be a hint of its trend heading into spring.
Below we plot Gold against Bonds and Gold against Foreign Currencies (FC).
Gold against the 30-year bond is shown with the 200 and 400-day moving averages
while Gold against FC and the 400-day moving average is plotted at the bottom.
As we can see, the Gold/Bonds ratio is attempting to breakout from two-year
resistance. The ratio has consolidated for the past nine months and now the
moving averages are aligned in bullish fashion. Meanwhile, Gold/FC is trading
above support but like Gold itself faces resistance from early autumn.
Gold has been lagging the miners recently and that is a good thing. The miners
should lead. However, as Gold nears resistance (potentially at $1250/oz) it
is important for it to show relative strength against the other asset classes
and in particular Bonds and FC. A breakout in the Gold/Bonds ratio would signal
that Gold would be less affected by weakness in Bonds (and rising yields).
Meanwhile, continued strength for Gold/FC would signal that Gold would be less
impacted by a rising US Dollar.
When focusing on the very short-term we see that Gold has been turned back
at $1220/oz while the miners have continued to grind higher. They opened lower
Wednesday but managed to close at the highs of the day. Their rebound is getting
long in the tooth but there is a chance they could grind higher towards the
red lines.
As Gold and gold mining stocks approach resistance we will keep an eye on
their performance relative to the movements in other asset classes. A pullback
from resistance is very likely but the question is if the pullback evolves
into a deeper correction or a bullish consolidation. In the meantime we have
focused on buying quality and value in the junior space while maintaining some
cash. The good buying opportunity we noted a month ago has passed but another
one will come soon one way or another.
