Longtime readers of our
editorials know that we are big fans of intermarket analysis as well as
ardent believers in the real price of gold (real POG) or relative Gold. No
this has nothing to do with the paper market versus the physical market. The
real POG is essentially the POG relative to other assets and markets. There
are two reasons why we track this. First, Gold priced against the other
currencies (specifically the Euro) has been a leading indicator for Gold in
US$ terms. Second, Gold's performance against commodities (in general) is a
leading indicator for margins of the miners. We
discussed this a few weeks ago. Over the weekend, I reviewed Gold's
performance in relative terms and it seems to have reasserted its uptrend.
In the chart below we graph
Gold against six other markets (foreign currencies, equities, oil, industrial
metals, and bonds). Note that Gold is in a steady uptrend against each market
with the exception of bonds.
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Gold priced in the inverse of
the US$ basket is only 4% off its all time high while relative to oil and
industrial metals, it just reached a one year high. Gold has turned down
relative to bonds as they are close to testing their all-time high.
Meanwhile, the yellow metal just matched a six-month high relative to the
S&P 500.
So why should we care about
all of this?
First, it tells us that Gold
is in a healthy bullish position because its trending higher against all
major markets with the exception of bonds. In other words, Gold is showing
broad strength and is only being held back by the strength in bonds, which
happens to be the largest market by a mile. Thus, when we see bonds soften,
Gold should have a shot to retest its recent high.
The strength in the real POG
usually reflects economic contraction or deceleration. After all, if things
were going well we'd expect equities and economically sensitive commodities
to outperform Gold. A rise in the real POG is a negative signal for the
economy and asset markets. That in itself is a catalyst for central bank
action which gives liftoff to precious metals and also explains why the real
POG is a trusty leading indicator.
The current interpretation of
the real POG bodes well for the underlying cyclical or intermediate term
trend which turned bullish in May. While we are here, here are a few quick
thoughts on the gold and silver shares. In the chart below we plot the two
support lines for GDX, GDXJ and SIL. It appears these markets will test the
lower support line.
Short term breadth indicators
(courtesy of sentimentrader.com) show only 15% of gold stocks trading above
their 10-day moving average and only 23% trading above their 50-day moving
average. The last time both these ratios were beneath 20% was July, in which
a tremendous rebound began.
Larger Image
To conclude, the real price of
gold is trending bullish which implies good times ahead for precious metals
in the coming months. The poor outlook for oil and industrial prices is a
good thing for gold and silver producers as their margins could expand even
further in the quarters ahead. The correction that began at the end of September
is likely within days of ending. Now, with mining equities trading off their
highs is the time to do your research and find the companies that will lead
the next leg higher and outperform the gold stock sector.
Good Luck!
If you'd be interested in professional
guidance in uncovering the producers and explorers poised for big gains then
we invite you to learn more about
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