The rally in the SPX/Gold ratio is nearing a critical decision point
From a post on the precious metals and the “new macro” in January:
The 3 Snowmen and the Precious Metals
I think the US will come back from this, both to its senses and to a sounder financial system. Gold will be at the center of this. The stock market will not. It was the beneficiary of the old macro. Unfortunately, a vast majority is operating as if we are still in Kansas (AKA the old macro). We’re not there anymore.
Indeed, if a rebound in stocks vs. gold doesn’t happen soon (again, it’s FOMC week), the SPX/Gold ratio will make its first monthly close below a key level. Either way, interim relative stock rally or continued decline, the era of stock market preeminence has been over since 2022 and into the foreseeable future.
It just so happens that very month the SPX/Gold ratio banged a low for the move and reversed upward. We had anticipated this move and it is not only in progress, it has risen all the way up to a decision point.
The daily chart of the SPX/Gold ratio is ticking the major downtrend marker, the 200 day moving average. That in itself is quite notable.
On the big picture macro chart you can see the long-term resistance that has represented our upside bounce target zone in the 1.50 to 1.65 area. SPX/Gold currently sits at 1.58.
As a side note, SPX/Gold is under no obligation to neatly stop here and reverse. Indeed, situations like this usually grind and test your soul. One could envision the situation of an ongoing grind for months and/or a finishing spike upward to conclude the move (among other options).
Complicating matters personally, is the fact that I am bullish on broad stocks for a 2026 pre-election ramp job as Trump, Warsh and Bessent look to the mid-term elections. This asterisk from an April 26th post on the macro situation tells that story:
* Again, I expect Warsh to have a little Bessent on his shoulder, whispering in his ear just as I believe “too late” Powell had a little Yellen whispering sweet “transitory” nothings in his ear when he should have been fighting inflation back in 2021.
The daily chart above shows a significant bounce in favor of the old macro. However, the long-term monthly chart tells the truth of what still is; a breakdown in SPX vs. Gold. The bounce is testing that breakdown.
As noted, just because I have drawn a few horizontal lines on a chart, it does not mean that the bounce has to stop at 1.65. But we will watch for it to halt in the months ahead, if not sooner, somewhere around this range. That could happen with a failure of the stock market rally, or gold, which has already done so much solid corrective work, rising better than stocks. Or some other combo of events.
But the bottom line is that the macro changed in 2022 (he takes this opportunity to once again show one of his favorite indicator charts)…
…and despite the rally to new highs in nominal stock markets, the recent outperformance in stocks vs. gold is simply an adjustment. If it goes as expected, it will remain just that.
The macro has changed and the investment rules (beyond the scope of this post) have changed as well.
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