Gold's Relative Strength and What It Means
The real price of gold is trending bullish, which implies good times ahead for precious metals in the coming months.
In the chart below we graph gold against six other markets (foreign currencies, equities, oil, industrial metals, and bonds). Note that gold is in a steady uptrend against each market with the exception of bonds.
Gold priced in the inverse of the US$ basket is only 4% off its all-time high while relative to oil and industrial metals, it just reached a one-year high. Gold has turned down relative to bonds as they are close to testing their all-time high. Meanwhile, the yellow metal just matched a six-month high relative to the S&P 500 (INDEXSP:.INX).
So why should we care about all of this?
First, it tells us that gold is in a healthy bullish position because its trending higher against all major markets with the exception of bonds. In other words, gold is showing broad strength and is only being held back by the strength in bonds, which happens to be the largest market by a mile. Thus, when we see bonds soften, gold should have a shot to retest its recent high.
The strength in the real POG usually reflects economic contraction or deceleration. After all, if things were going well we'd expect equities and economically sensitive commodities to outperform hold. A rise in the real POG is a negative signal for the economy and asset markets. That in itself is a catalyst for central bank action which gives liftoff to precious metals and also explains why the real POG is a trusty leading indicator.
The current interpretation of the real POG bodes well for the underlying cyclical or intermediate term trend which turned bullish in May. While we are here, here are a few quick thoughts on the gold and silver shares. In the chart below we plot the two support lines for Market Vectors Gold Miners ETF (NYSEARCA:GDX), Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) and Global X Silver Miners ETF (NYSEARCA:SIL). It appears these markets will test the lower support line.
Short-term breadth indicators (courtesy of sentimentrader.com) show only 15% of gold stocks trading above their 10-day moving average and only 23% trading above their 50-day moving average. The last time both these ratios were beneath 20% was July, in which a tremendous rebound began.
To conclude, the real price of gold is trending bullish which implies good times ahead for precious metals in the coming months. The poor outlook for oil and industrial prices is a good thing for gold and silver producers as their margins could expand even further in the quarters ahead. The correction that began at the end of September is likely within days of ending. Now, with mining equities trading off their highs is the time to do your research and find the companies that will lead the next leg higher and outperform the gold stock sector.
Editor's Note: See more from Jordan Roy-Byrne at The Daily Gold.
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