BARRICK GOLD AND NEWMONT MINING HIT 52-WEEK HIGHS -- GOLD IS SOARING VERSUS THE CHINESE YUAN WHICH MAY PROMPT CHINESE BUYING -- GOLD AND GOLD STOCKS ARE STILL CHEAP RELATIVE TO S&P 500 -- GOLD IS OVERBOUGHT BUT STILL THE STRONGEST MARKET IN THE WORLD

BARRICK AND NEWMONT MINING TURN UP ... With gold hitting new record highs each day, gold stocks are starting to play catch-up. Two of the biggest are at or very close to hitting new 52-week highs. Chart 1 shows Barrick Gold closing at a new 52-week high today. The gray line is the ABX/SPX ratio which has been dropping since February and just starting to rally. Chart 2 shows Newmont Mining closing at a new 52-week high as well. Its relative strength ratio (gray line) is turning up as well. What the two RS lines tell us is both big gold stocks are pretty good values relative to the rest of the market and are starting to show upside leadership for the first time in eight months.

Chart 1

Chart 2

GOLD VERSUS CHINESE YUAN... I wrote an article on Tuesday showing that gold was rising faster than all of the world's currencies -- not just the dollar. That's a sign that there's more behind the gold uptrend than just dollar weakness. I suspect it has more to do with asset allocation. Stocks have lost ground over the last ten years and haven't been a good investment. Bond yields are at historically low levels and don't offer much value. With the dollar tumbling over the last decade, the only two asset classes that have made money are foreign currencies and commodities. Gold has been the strongest market of all. In my view, that's why global investors (including central banks) are buying gold. It's the only market hitting a new record. Part of the recent gold rally has been attributed to heavy buying by the Indian central bank. I suggested that other large emerging markets (including China) would most likely follow suit. Here's another reason why. Chart 3 compares the US Dollar Index (green line) to the Wisdom Tree Dreyfus Chinese Yuan ETF (CYB) over the last year. Although the yuan has done a bit better than the dollar over the past year, it doesn't fluctuate too much from it [the yuan is closely tied to the U.S. Dollar]. Chart 4 shows what gold looks like relative to the yuan ($Gold:CYB). If you were a Chinese central banker with an undervalued currency and you had to choose some market to diversify your huge currency reserves, which market would you choose? I would put gold at the top of the list. Especially since gold is now the strongest de facto currency in the world.

Chart 3

Chart 4

GOLD HAS BEEN STRONGER THAN STOCKS FOR TEN YEARS ... I first showed the following stock in my 2003 book on Intermarket Analysis. It's a ratio of gold divided by the S&P 500 on a log scale. The point of the chart was to demonstrate that a generational shift had taken place between stocks and gold in favor of gold. Gold has outperformed the S&P 500 by 300% since 2000. Despite the fact that gold is trading at a new record high, it's still cheap relative to stocks. Chart 6 shows the GLD/SPX ratio just starting to turn up after falling from its March high. In my view, that makes gold a pretty good value relative to stocks. The same is true of gold stocks. Chart 7 shows the Market Vectors ETF (GDX) divided by the S&P. The ratio has been consolidating since March and just starting to trend higher. That makes gold stocks a good value as well.

Chart 5

Chart 6

Chart 7

BULLION NEARS $1100 ... Chart 8 shows bullion nearing $1100 and moving into overbought territory (as measured by the 14-week RSI line). Gold is close to achieving a shorter-term upside objective around $1100 and may be in need of a pullback. Any such pullback should find major support around $1000 (if it pulls back that far). A longer range objective to $1300 remains unfulfilled. Wall Street keeps saying that gold is too high to buy and has no reason for going higher. It's been saying the same thing since 2000. At the moment, gold is the strongest market in the world. That's why the Indian central bank is buying some and why other emerging markets may follow.

Chart 8