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The Important Breakout in the Dow to Gold Ratio and Its Implications for Gold


It doesn't look like gold's period of decline is quite over yet.

Let's move on to gold's very long-term chart now.

Click to enlarge

In this chart, we see a situation quite similar to the declines to 2008, where a sharp pullback was followed by a continuation of the severe decline. The most bearish factor here is the shape of the decline, which is a reverse parabola. This formation results in accelerated declines and makes it difficult to tell how low prices will go. Although the declines will likely end shortly, the increased volatility could result in prices moving very low quickly while still being in tune with the trading pattern. This reverse parabola has been in place since last October.

The very long-term cyclical turning point suggests that a local bottom will be seen soon – within the next month, probably about two weeks from now. Keeping both of these factors in mind, we should prepare for even bigger declines.

Let us have a look at the Dow (INDEXDJX:.DJI) to gold ratio chart, as an important technical development took place there.

Here, we saw an important breakout above the declining long-term resistance line. This has bearish implications for gold. Please note that the breakout above the previous – much less significant – resistance line (the red declining line on the above chart) was followed by major declines in gold.

The next resistance level for this ratio is at 12.5, and with it currently at 11, declines in gold will surely be needed in addition to higher stock prices in order for the ratio to move this much higher (it seems that a move higher in the general stock market will not be enough for the ratio to move that high soon). The implications are, of course, bearish.

Summing up, the situation remains bullish for the USD Index. The recent declines in the Euro Index along with the breakout in the USD Index will likely keep the current bullish outlook in place for the coming weeks. The implications of the bullish situation here, especially for the medium term, are bearish for the precious metals. Gold prices declined last week and pulled back on Thursday, but it still does not seem that this period of decline is completely over.

For the full version of this essay and more, visit Sunshine Profits' website.

Twitter: @SunshineProfits
No positions in stocks mentioned.
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