Wednesday, May 5, 2010

Excellent Entry Point For Gold?

I believe it is!  While the stock markets and GOLD market have been rocked by the situation in Greece, which this morning turned into riots, behind the scenes, the precious metals market has demonstrated a certain resiliency that is only demonstrable by looking at some relative analysis.

In order for GOLD, and the underlying precious metals miners, to really take off, as we have been predicting, they must both divorce themselves from the stock market AND the dollar.  That has already begun.

The dollar index, or DXY, as it is often referred to, bottomed in December, 2009 at a reading of 74.  The index is computed by comparing the U.S. Dollar to a basket of 10 currencies.  Unfortunately, the computation of the index is highly skewed towards the EURO, which represents nearly 60% of the weighting, followed by the YEN and POUND. 

The EURO has been incredibly weak and speculation has begun that it will lose its regional reserve-currency status.  As the DXY is relative, the weakness in the EURO shows up as STRENGTH in the DOLLAR.  So, the DXY is a rather poorly constructed gauge.

Nonetheless, the DXY currently stands at about 84 - a roughly 15% increase in the last 4 months.  GOLD's most recent interim top of $1,200 per ounce coincided with the bottom in the DXY.

However, GOLD, which bottomed in February at around $1,050 per ounce, has since climbed in a stair-step fashion reaching nearly $1,200 a couple of days ago, despite the ongoing strength in the DOLLAR.

So, we now have a clear and consistent pattern of a rising DOLLAR and rising GOLD. 

As to the stock market, a better way to measure relative strength is to review the ratio of precious metals miners to the Standard & Poors 500 (SPX).  The preferred index of miners is the "HUI", or the "Gold Bugs Index".

The ratio created by dividing the HUI by the SPX is an excellent measure of the relative strength of miners to the overall stock market.  This ratio also peaked in December, 2009 at a reading of about 0.45.  It then fell to a low of about 0.33 in late March.

Since then, the HUI/SPX ratio has risen to 0.38 and has broken above its 200 day moving average.  Yesterday's onslaught only brought it down slightly.  It has also completed what appears to be a "head and shoulders" bottom - a pretty reliable chart formation often signalling a low of major importance.

Like any chart pattern, an H and S top or bottom is only a method for improving the odds and far from "inflammable", as Archie Bunker might say.  Nevertheless, it, in conjunction with the strength of GOLD relative to the DXY, suggests that a major shift is taking place in the underlying technicals of this market.

Add to that, the excellent fundamentals of record revenues and earnings being reported by the miners, and you have all you need to see the precious metals market embark on the hyperbolic growth phase we have repeatedly called for.

The couple-day meltdown is extremely common for this phase of a mania.  Everytime it looks like GOLD is taking off and investor sentiment gets too bullish or confident, an extreme shock keeps everyone on their toes.  It's also the reason I have consistently warned about the dangers of overtrading a market like this.  Even "per"fessionals learn the folly in trying to time every turn.  It's a great way to NOT make money even in a rising trend. 

Thus, we are now set up for what I believe ought to be an excellent entry point.  In no way do I believe that the last couple of days negated the bullish prospects. 

Marko's Take

Our newest YouTube video entitled "Social In-Security:  The Problem" will be available sometime today.  You can access it by clicking  I would also like to thank Bill Murphy's excellent LeMetropoleCafe newsletter.  For all you GOLD-philes, it remains the best value for a newsletter out there.  You can access it by clicking here

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