Gold is currently getting a reprieve as it trades close to $1240 which is
above important weekly support at $1200. It's safe for the time being but we
believe that Gold will ultimately break back below $1200 and below $1100 before
the end of the already long in the tooth bear market. Because Gold is somewhat
of an anti-asset, it's important to chart its course against other asset classes.
Gold performs best when its strong against all other classes. Moreover, prior
to recent important bottoms Gold bottomed first against other classes before
bottoming in nominal terms. It appears that could happen again.
The first chart looks back at the 2008 bottom. We plot Gold against foreign
currencies, commodities, global equities and the S&P 500. Gold's lowest
tick was late October 2008 while its daily low was in November 2008. Against
other asset classes, Gold bottomed before then. Gold bottomed against foreign
currencies and the S&P 500 in September while bottoming against global
equities in May and commodities in June.
We should also note that while Gold bottomed in April 2001, it bottomed in
real terms (against foreign currencies, equities and commodities) months before
then.
Let's look at the same charts today. While Gold has only recently emerged
from a weak triple bottom, it is showing more strength against the other asset
classes. Against foreign currencies Gold is nearly 10% above the December 2013
low. Gold is very close to an 11-month high against commodities and is trading
at a 7-month high against global equities. Gold remains weak against the S&P
500.
Going forward there are a few things we will be watching. Assuming Gold breaks
back below $1200 and eventually below $1100, will it be able to hold these
recent lows against the other asset classes? If yes then that will show that
though Gold is declining it is maintaining the kind of relative strength that
was in place at previous major bottoms. Secondly, the Gold vs. S&P 500
ratio is very important. US equities and precious metals have been on a divergent
course since the summer of 2011. If we get a weekly close in the ratio above
0.75 then it would signal a major turning point in favor of Gold.
In the meantime we would advise continued caution. Gold and Silver have bounced
but only from an extreme oversold condition. Though Gold has rallied $50/oz
the miners have done nothing. The large caps (GDX, HUI) are trading dangerously
close to recent lows while the juniors (GDXJ) have tread water at best. They
are hinting that this rally won't last. Please stand aside for the time being.
I see a potential lifetime buying opportunity emerging in the months ahead.
Good Luck!
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