Gold From The Top Down

Oh Gold…

This one has been a dear friend throughout my career. Kind of like Google actually. We have a close relationship. You know those specific stocks, or assets classes, that you’ve just been right about and done well with that just bring a smile to your face when you hear the name? We all have those. The opposite is also true in some of the names that you just can’t get right. Believe it or not, Apple was one of those for me for a long time. But over the last year it’s been different and I’ve actually gotten it right for a change. So don’t think that just because you’ve been good (or bad) with something, that it will stay that way forever. Stay objective.

Which brings me back to Gold. So what do we make of the silly yellow metal that’s making all this noise throughout the media lately? The dreaded death cross right? Isn’t that funny? Maybe I find humor in things that other people don’t. But “Death Cross”?? Come on. Can we come up with something any more ridiculous? It’s almost as good as the Golden Cross.

Legend has it that when the 50 day crosses over the 200 day simple moving average, that’s a golden cross and is a good thing. The death cross is when the 50 day crosses below the 200 day. The media likes to make a big thing about it because it sells and people like it. And that’s fine. But the truth is that it means absolutely nothing at all. And an argument can be made that the pessimism (or optimism) that it brings can actually be taken from a contrarian’s perspective and signals to do the opposite. My friend Ryan Detrick put out a chart this week showing how many times Gold has actually gone up after these dreaded death crosses….

2-24-13 gold death crosses

So let’s focus on Price and forget about all this other nonsense. My first chart shows Gold long-term and is adjusted for inflation to show real prices, not this nominal stuff, to get a good idea of where we’re really at (click chart to embiggen)

2-24-13 Gold inf adj

It looks to me like over the last year and half, gold prices have been consolidating near an area that makes sense. The real all-time highs back in 1980 came after a parabolic move that couldn’t really hold. I suppose you can make the argument that the big time long-term resistance came just under $2000. So it shouldn’t come as a surprise that we’ve been struggling up here since September of 2011.

Now, let’s put that correction into context for a hot minute. We’re essentially looking at a 20% down move that has turned into a fairly wide range for 18 months. No new highs or new lows for a long time. This 20% down move and time consolidation came after more than a 600% move over 10 years. I’d say that the correction was more than earned/deserved.

This next one is a weekly logarithmic scale nominal chart showing the monster move so far this century. It’s fascinating how the peaks connect so nicely. But the uptrend support lines, whether drawn aggressively or more conservatively, show that more downside in Gold is certainly possible. 1450 and even 1150 can be hit without changing the upward trajectory that it has on a secular basis. And those aren’t predictions or a target. But I think it’s worth pointing out that those lines are there. I think to ignore them would be irresponsible.

2-24-13 gold weekly

Now let’s look at some near term support levels. This is a daily bar chart showing two important trendlines that broke this month. It’s never a good thing when 2 big ones break within a few weeks – definitely some heavy selling pressure. Currently the price of Gold is sitting at the bottom of this 18 month range where buyers have stepped in before. That’s the good news. The bad news is that this is the 4th time down here. The more times it’s tested, the higher the likelihood that it breaks. We’re seeing that phenomenon play out in the British Pound right now.

2-24-13 Gold daily

Now back to the weekly chart to look at some retracement levels. If we do break this key support, and probability increases with each retest, there are 2 levels that stand out. If we take the recent monster move off the 2008 bottom, the 38.2% Fibonacci Retracement comes in around 1450, and the 61.8% Fib level is around 1150. I find it interesting that we just mentioned those 2 possible areas when we discussing the uptrend lines in the weekly log chart above. The power of support clusters…remember that.

2-24-13 gold fib levels

As far as the upside is concerned, Gold certainly has some work to do before we can start talking about targets. Once we have a nice pivot low, we can look at some Fibonacci extension targets and potential measured moves. But to bottom fish down here makes no sense to us at all unless you’re a really short term trader that enjoys scalping falling knives. Not my game personally.

I think the good money to be made here has been in the relative gold charts. I’ve been pretty vocal about the Gold vs Gold miners pair. And it continues to work well as both Gold miners ($GDX) and Junior Gold miners ($GDXJ) get destroyed. Here is an up-to-date chart of Gold vs the Miners. We had a nice breakout from that flag pattern to start the year. And now this week we’ve confirmed even higher after breaking out above the May highs.

2-24-13 gold vs gold miners

I also continue to see some interesting developments out of the Platinum/Gold Ratio. I first brought this one up in early December as we started to see some momentum divergences in favor of Platinum. And since then, a 10% up move in the pair, but more importantly some key resistance levels have been broken. This is definitely one pair that we want to keep on our radar:

2-24-13 gold vs platinum

And finally I want to take a quick look at one of my favorite long-term charts in my chart book. This one is the now infamous Dow to Gold ratio. My pal Joe Weisenthal, who actually just got named Executive Editor at Business Insider (congratulations buddy), likes to ask me all the time, “JC, if you were stuck on a deserted island with just one chart, what would it be?”. And my asnwer is always the same. “The Dow/Gold chart of course”.

Readers of the blog have seen this one before. But here is a long-term chart of the “Real Money vs Paper Money”, as it is often called (click chart to embiggen):

2-24-13 dow gold ratio

This one historically doesn’t find a bottom until the ratio gets down to about 1:1. Today, with the Dow Jones Industrial Average at 14,000 and Gold prices at 1480, we’re looking at about an 8.86 ratio up from a low in August 2011 below 6. We could potentially even see this ratio get up near 10:1 before possibly rolling over again. This is a really really long-term chart, where we have data going back over 100 years. So yea, not a day trade.

But I think it’s worth talking about, especially as governments around the world continue to dilute their currencies (fiat money). There’s no diluting of Gold. You can’t print more of it. Hell, they can barely find more of it. But that’s a different discussion for a different day. Let’s look at price:

2-24-13 dow gold ratio daily

As you can see in this shorter-term look, we had a nice break above the multi-year downtrend earlier this year. The “false breakdown” that occurred in 2011 has given this pair legs that could certainly take it up towards 10:1. From there we’ll just have to reevaluate the situation. But I don’t think that this secular move in Gold over Stocks is over from a secular perspective. We’re about 13 years in for this particular collapse. Remember, the Real Money vs Paper Money bubble popped in 1999 above 44:1. This sucker has been crashing ever since.

I think this is a great example of how powerful counter-trend bear market rallies can be within ongoing secular moves. So far this one is up over 50%.

I hope this sheds some light on all of the different time frames and ratios that we look at for Gold. There are obviously some more of them (silver/gold, gold/S&Ps, etc) but we could be here all day. These are a few of the ones that I think are worth pointed out right now.


Related Posts:

Metals vs Miners (Jan 24, 2013)

Will Platinum Start to Outperform Gold? (December 4, 2012)

Why Do We Need Gold Stocks (August 3, 2012)

Decision Time For Gold is Quickly Approaching (July 29, 2012)

Talking Gold & Silver With Jeff Macke (Jan 4, 2012)