Current gold ratio setups, a real world view of ratio analysis ‘White Paper’
As the Cyprus drama and other macro events play out and distort normal macro economic signals to varying degrees in the short-term, let’s review the ‘real price’ of counter-cyclical gold vs. the cyclical industrial metals:
Au-GYX bottomed hard in February, MACD sported a positive divergence and now the ratio has turned up hard, despite the economic growth signs in the US. Global growth, especially in materials-intensive China has decelerated.
Regardless, the Cyprus hysteria has driven the ratio up to an over bought level at the SMA 200, which is a logical area for a pullback. Support is noted (green). The target off the bottoming pattern is 4.60 or so.
Au-Crude Oil is also in a bottoming pattern, but has not broken above the neckline. A break above that area would target the SMA 200 in the low-mid 18’s. The two charts above are constructive to the fundamental case of the beleaguered gold mining sector as gold simply must begin to out pace miner cost-input commodities for any kind of fundamental case to be engaged. That is why gold stocks are counter-cyclical.
Turning to the weekly chart of gold vs. the S&P 500, there is a bounce in progress at a last-ditch support level. A failure for counter-cyclical gold to gain traction vs. the great market of happy hopes and dreams would bring on more sweet dreams for US stock market players and a nightmare scenario for hard core gold bugs. The red arrow measures the pleasure and pain, respectively. Support needs to hold here for a near term bull case in gold and especially the gold mining stocks because after all, if it is as easy as throwing a dart at the S&P 500, why on earth would one suffer the agony and ignominy of the gold mining sector?
Above is a weekly chart of gold vs. the Euro, first published in a post from December: What’s Wrong With Gold?
As you can see a few months on, gold continued its breakdown in Euros but has held our “Gold would be broken below here” parameter. This is an important parameter and it is holding.
The precious metals are making strides here. As tedious as it sounds, any investment case – such as it is – on the gold stock sector depends on the counter cycle, not on the ‘everything’s going up because inflation fears are breaking out!!!’ cycle.
The gold stocks have been miserable, and this is more a reflection of the challenges facing the sector aside from recently depressed gold-to-commodity ratios. These challenges include the S&P 500 out performing gold, geopolitical issues, management execution issues, etc. Through repeated execution failures and questionable decision making we realize that as a group, the sector holds many poorly managed companies, which is why only the quality ones should ever be considered. Mining by its very nature is a difficult and problematic industry.
So disclaimers aside, the real price of gold is a slow and steady indicator of the counter-cycle, which is the time for the gold sector to be thought of as unique. Another chart exhibits proof of the counter-cycle, the Au-CCI ratio AKA the ‘real’ (commodity adjusted) price of gold:
Au-CCI is on a long-term up trend but periodically spikes down when people (and mainstream economists) get giddy about economic growth. Today they are giddy. But a chart is in an uptrend until it no longer is. This one would have to impulsively violate the top shaded support level to reverse the trend.
In a way similar to how the AMAT-SOX ratio (or semi equipment stocks to broad semiconductor sector ratio) that we noted yesterday can be a Canary to a Canary in a coal mine, so too can the gold-silver ratio (GSR) be a more sensitive indicator to coming liquidity problems that would eventually be more broadly seen across the spectrum of gold’s ratios to things positively correlated to the economy. Here’s the GSR, shown by monthly chart approaching an important decision point.
A break upward and liquidity is going to come screaming out of the markets, with a deflationary backdrop the likely play. A break downward and rising inflation fears would be likely.
I realize that posts like this can be confusing and certainly are no fun, but there is a reason that so many market participants are confused right now. Looking under the hood at some of the mechanics going on in the macro markets (i.e. reviewing gold’s ratios) can bring clarity.