FALLING DOLLAR BOOSTS PRECIOUS METALS -- IT'S A GOOD SIGN WHEN GOLD SHARES LEAD BULLION HIGHER -- NASDAQ STILL TESTING SPRING HIGH
DOLLAR INDEX FAILS TEST OF 200-DAY AVERAGE -- EURO CLEARS 50-DAY LINE ... The last time I showed the U.S. Dollar Index, it was testing its July high and its 200-day moving. Since then it has weakened noticeably. Chart 1 (plotted through Friday) shows the USD falling below its 50-day moving average for the first time in a month. That's not overly conclusive, but does raise the possibility that the dollar rally may be ending. Chart 2 shows that the Euro is a nearly perfect mirror image of the USD. The last time I wrote about the Euro I noted that it was bouncing off chart support along its summer low and its 200-day moving average. I suggested that Euro buying (and dollar selling) should produce some buying in precious metals and their stocks. That's been the case over the last couple of weeks.
Chart 1
Chart 2
GOLD STOCK ETF IS LEADING GOLD ETF HIGHER ... During my visit to Switzerland last week, I had time to chat with Ian McAvity, a Canadian technical analyst with a long history in precious metals and mining stocks. Ian shared several ideas with me which form the basis of the next few charts. The recent dollar downturn has caused buying in the precious metals area. Chart 3 shows the streetTracks Gold Trust Shares (GLD) bouncing off its summer low. It still needs a decisive close over 60, however, to turn its trend higher. Chart 4 plots the Market Vectors Gold Miners ETF (GDX) and is based on an index of gold snd silver shares of the same name. The GDX is traded on the AMEX. Chart 4 shows the GDX also bouncing off its June low. It's already exceeded its late September high and is now challenging its 200-day moving average. As Arthur Hill pointed out last week in my absence, gold stocks are moving up a little faster than bullion (solid line). That's a good sign for both if that trend continues.
Chart 3
Chart 4
GOLD STOCKS USUALLY LEAD BULLION HIGHER... Chart 5 Compares the Gold stock ETF (GDX) (purple line) and the Gold ETF (GLD) (gold line). They generally rise and fall together. But there's more to it than that. The relative strength ratio along the bottom of Chart 4 divides mining stocks (GDX) by bullion (GLD). The ratio bottomed in in late 2000 and the risen since then. A closer examination of the ratio shows the bullion usually does better when the ratio is rising and gold shares are stronger than the commodity. The blue arrows mark upturns in the stock/bullion ratio. Each of those upturns were followed by rallies in gold (gold arrows). The GDX/GLD ratio has been moving sideways, however, since late 2003. Let's take a closer look at why.
Chart 5
GOLD STOCK/GOLD RATIO REACHES MAJOR RESISTANCE... Chart 6 shows why the GDX/GLD ratio has been moving sideways for the last three years. In late 2003, it reached major resistance formed during 1996. So far, the sideways action looks more like a consolidation of that uptrend (in the form of a triangle) than a trend reversal. Although some of the relative weakness in gold shares is probably due to popularity of the the new gold bullion ETF, it will still be better for both if and when the stock/gold ratio starts moving higher again. [Chart taken from Ian McAvity's newsletter, Deliberations on World Markets (PO Box 182, Adelaide St. Station, Toronto,ONT. M5C 2J1, CANADA)].
Chart 6
GDX:GLD RATIO GIVES INITIAL BUY SIGNAL ... Chart 7 is a point & figure version of the GDX:GLD ratio. It shows a sideways trend throughout 2006. The ability of the last x column to exceed a previous x column this month is an initial buy signal. That would seem to justify some nibbling in either the shares (GDX) or bullion itself (GLD). A more convincing buy signal, however, requires the ratio to exceed its September peak at 67.
Chart 7
NICE JOB, ARTHUR ... I'd like to take the opportunity to thank Arthur Hill who filled in so ably for me last week. One of our subscribers attending the conference in Switzerland suggested no need to rush back because Arthur was doing such a nice job in my absence (Hmmm). In the days ahead, I'll try to share some of the ideas I picked up in Europe. One can't help but benefit from exposure to some of the best technical analysts in the world. I return a bit more humble but, hopefully, a bit smarter as well.
