In recent commentaries, we’ve focused on the macro factors that will drive acceleration in the precious metals sector. Namely, the gradual exodus from both government and corporate bonds as authorities are forced to monetize debts in an effort to avoid rising interest rates, which would hasten default and bankruptcy. This, and not bank lending or consumer demand, is the cause of severe inflation.
Predicting the timing is more difficult then the actual event. Luckily for our subscribers we constantly pour over numerous technical charts and sentiment indicators in order to advise as to favorable entry and exit points. In analyzing Gold, we find that intermarket analysis is an essential tool. Intermarket analysis is analyzing a market by comparing it to other markets.
For Gold, the first study is a comparison with the S&P 500. In this chart I show Gold next to the Gold/S&P 500 ratio.
Every large or impulsive advance in Gold was accompanied by a similarly large move in the Gold/S&P 500 ratio. Currently, the short-term trend for Gold is higher but the trend for Gold/S&P 500 is lower. Simply put, before Gold can embark on an impulsive move, investors will need to favor Gold over stocks. Gold can only rise so much if money is moving into stocks at the same time.
Another important and obvious example is the US Dollar. In the chart we show Gold plotted next to the inverse of the US Dollar.
Gold can rise at the same time as the US$. We all should know that by now. Also, Gold can perform very well even if the US$ is flat. However, the point here is that as long as the US dollar is rising, it will be difficult for Gold to embark on its next impulsive advance.
Relatively speaking, Gold is performing well against other markets like commodities, various currencies and treasury bonds. However, it is clear that the yellow metal will need to regain its footing against stocks and the US currency will need to peak or pause for months before we can expect Gold to make an impulsive advance to $1500 and beyond.
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Jordan Roy-Byrne, CMT