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Can 1976 Give Us Insight Into Gold's Price Behavior?


Last week a pause was seen in the decline around the level of gold's previous bottom. This is very similar to what was seen way back in 1976.

Now let us have a look at two important ratios that show gold's performance relative to other important groups of assets. The first one is the Dow to gold ratio chart, which is a proxy for a "stocks to gold" ratio.

Little has changed in this ratio last week; it seems that the comments I made in last week's essay remain up-to-date:

Here, we saw an important breakout above the declining long-term resistance line. This has bearish implications for 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.

The second important ratio that we'd like to discuss today is the gold to bonds ratio. Let's have a look.

In this another important ratio for gold, some strength was seen last week. Overall, however, this is not enough to change the outlook at this time, and the short-term trend remains down. The next support line is the 61.8% Fibonacci retracement level, at 3.79, more than one-half point lower than Thursday's closing ratio level of 4.31. This is also equal to the level of the 2008 bottoms in terms of the closing prices.

Summing up, last week a pause was seen in the decline around the level of gold's previous bottom. This is what we expected as it is very similar to what was seen way back in 1976. History does seem to rhyme here, and since back then, a bigger decline followed this type of move, we expect to see the same once again.

Thank you for reading. Have a great and profitable week!

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

Twitter: @SunshineProfits
No positions in stocks mentioned.
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