Monday, February 1, 2010

A Technical Review Of Gold And Silver

"Technical", as it pertains to the analysis of a market, differs from "fundamental".  The former refers to indicators like ratios, graphs and charts.  To some people it's entirely akin to voodoo. It is typically employed as a tool of timing.  The latter takes into account factors such as supply and demand and tends to be more tangible.  Some investors completely avoid technical analysis, while others RELY on it completely.  One of my favorite technical analysts is Clive Maund (
This analyst thinks BOTH have value, however I'll focus only on technical analysis. 

Often, the beginning spot for technical analysis is whether a market is "overbought" or "oversold".  Either refers to an extreme level of virtually uninterrupted movement in a particular direction.  For example, on a short-term basis, the precious metals market is clearly oversold.  While that improves the odds of a reversal, it is nothing more than a necessary condition, but hardly sufficient.  Markets can remain oversold or overbought for extended periods of time. 

So, lets do some Marko's "Take-nichal" analysis and see where the chips fall.

The ratio of the "Gold Bugs Index" (HUI) to the price of Gold is a great place to begin.  Historically, this ratio has traded between 0.4 and 0.6.  In a healthy market, individual miners will outperform Gold itself and the ratio will tend to increase.  In November 2008, the HUI/Gold ratio traded near its all-time record low of 0.2 and subsequently climbed to 0.45 in September 2009.  In mid-January 2010, the ratio began to plunge and now stands at 0.346.  This is NOT indicative of a healthy market.

Next is the ratio of Gold to Silver (GSR).  In a healthy market, Silver will tend to perform better than Gold and the resulting ratio will fall.  The GSR spiked at about 90 in November 2008 and trended lower until September 2009, when it bottomed at 57.5.  Recently, it has spiked higher and now sits at 66.6 (Is Satan watching?).  Again, this is NOT indicative of a healthy market!

We can also review the ratio of the S & P 500 to the price of Gold.  In a healthy market, we would expect the price of Gold to outperform stocks.  The most recent peak in this ratio occurred in September 2008, at about 1.65, which FELL to 0.75 in March 2009.  Subsequently, the ratio has climbed to 1.1 in August, 2009, but has trended mostly sideways since then.  Its current reading is 0.99, but looks like it may break lower, also.  At best, this ratio is NEUTRAL, but on the cusp of going NEGATIVE.

Finally, it makes sense to review the ratio of Gold to the Dollar index.  In a healthy market, Gold will perform BETTER than that suggested by the direction of the Dollar.  It is well-established that Gold and the Dollar behave inversely, however, movements in the Dollar can be dominant or merely a factor in the direction of Gold.  From November 2008 through December 2009, Gold advanced MORE than the amount suggested by the decline in the Dollar, which is very bullish.  Since then, the opposite has been true and threatens to deteriorate further.  Therefore, at best, this ratio is still NEUTRAL but also on the cusp of going NEGATIVE.

Marko's Take?  "Danger Will Robinson"!  It is always best to avoid what professionals call "trying to catch a falling knife".  Eventually, the Gold market will stabilize and provide a terrific opportunity, however, it appears very premature to load the boat. 

I remain just as convinced, especially in light of the re-appointment of "Helicopter Ben", that Gold and Gold miners will be the go-to investment of 2010.  So, only a little patience is needed.  Nevertheless, why incur a loss, even if temporary, if it can be avoided?

If you think someone has belted me with a Gold Bar and I'm seeing stars, you know what to do:  TAKE ME ON!

Marko's Take

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Take me on!