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Gold Could Be Putting in a Low


Recent trends seem to suggest that the pullback of the past two days in both gold and its shares will be short-lived.

The GLD gold ETF dumped 22 tonnes of gold yesterday, bringing its holdings back down to 631 tonnes. That's a decline of a little over 3%. Other than twice in the first few weeks of its history in 2004 when the fund was still basically in the process of forming and there was a lot of volatility, I couldn't find one instance of a 3% or more decline in GLD's history. The only thing that comes close to this sort of a panic was a 2.3% decline in its holdings on June 26, 2007, which was a low. Will history repeat itself?

Click here to enlarge.

The XAU/Gold ratio fell nearly 4% to 0.2064 yesterday. In other words, based on this indicator, gold shares have only been cheaper (relative to gold) on two other occasions since August (i.e.- once on the August low and again at the late December low), and recall that a ratio of 0.2 (or lower) to 0.22 is at the lower end of this ratio's 20-year range.

Click here to enlarge.

Click here to enlarge.

With the GLD only having seen a panic such as yesterday's on one other occasion (which was a low), and the XAU/Gold ratio only being this low on two other occasions since August (which were also lows), there is also a lot of evidence to suggest another low risk entry point into the gold sector is now at hand.

Whether that means we rally simply off of Boom Boom Ben's dovish words today in anticipation of 75 or 100 bps of easing on the 30th (75 bps is currently being priced in by the fed funds futures by Jan 30) or in reaction to an actual rate cut today or Friday, I don't know. But the stage does appear to be set for another important low to be put in this week.

That the dollar may rally when the Fed eases (set up by the big rally in the dollar versus the euro yesterday in response to the ECB's dovish "verbal intervention") is something many may not be expecting, but it wouldn't surprise me in the least. The fact is that all the major central banks are going to eventually be forced to run the printing press together. So, trying to determine where the dollar is going to trade against these other pieces of paper is going to be increasingly difficult going forward, I suspect.

If the dollar does rally like it appears to be set up to do, it will no doubt fool many into thinking that gold must then go down, but as I have pointed out before, gold's rally is not just a weak dollar phenomenon. It's a reflection of the breakdown in the fiat dollar based monetary system, meaning that all fiat currencies are now in question from the market's perspective, because they all derive their "value" from the fiat dollar. As a result, gold is rallying in all major currencies and at all-time highs in all those major currencies.

The bottom line is that recent trends seem to suggest that the pullback of the past two days in both gold and its shares will be short-lived, even if we get coordinated action from foreign central banks in the near-term in order to support the dollar while the Fed moves to ease more aggressively.

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Position in gold, gold shares.

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