The current trendy reason for the mainstream to dislike Gold is strength in
the US Dollar. On the surface it makes quite a bit of sense. Gold is priced
in dollars. Dollar strength automatically pressures the Gold price. However,
this popular view reveals a total lack of introspection. Since the end of 2013
Gold is essentially flat (positive by a fraction) while the greenback has gained
a whopping 14.9%. Better yet, since Gold's early November low it has gained
6.0% even while the US$ is up 5.8%. This type of relative strength within the
context of an aging bear market may be another sign of a major trend change
brewing under the surface.
Gold has a history of leading the buck at important lows. It makes sense because
if Gold is going to rebound strongly it should do so in real terms and not
just as a mirror of the buck. The chart below plots weekly line charts of Gold
and an inverted US$ index. In blue we plot important bottoms in Gold with the
corresponding bottoms in the inverted US$ in red. Note how Gold started to
rebound at least a few months before the inverted US$. We should also note
that during 1976 Gold bottomed in August while the US$ didn't peak until December.
Turning to the present, Gold is on the cusp of a mini breakout but we'd really
like to see it show more strength against equities. We've recently noted that
Gold has broken out to a 16-month high against foreign currencies and a 17-month
high against commodities. Yet it has remained weak against global equities.
Below we plot Gold, Gold against the S&P 500 and Gold against the MS World
index (world excluding the USA). If Gold can push above $1220 in the coming
days then it could rally up to $1270-$1280. Gold is very close to an important
breakout against global equities (ex USA) but still has work to do against
the S&P 500.
Though Gold has been flat over the past three months it has quietly gained
important relative strength. It recently touched a 16-month high against the
Euro and a 17-month high against commodities. It has rallied even as the US$
has rallied. These are some very positive signs that hint that the worst could
be over. In my opinion, the last thing Gold needs to do for bulls to win the
argument is break its downtrend relative to the S&P 500. That negative
correlation has killed Gold throughout the bear market and a reversal in favor
of Gold would be very significant. We are long select juniors as we believe
at worst, a decent rebound in the sector has begun. Time will tell if it evolves
into a new bull market.
Good Luck!
