GOLD LOSES SAFE HAVEN APPEAL AS STOCKS HIT NEW RECORDS -- GOLD MINERS ARE LEADING BULLION LOWER -- STOCK/GOLD RATIO HAS DONE A GOOD JOB MARKING TURNING POINTS IN BOTH MARKETS -- AND IT'S STILL RISING
GOLD SPDR FAILS TEST OF RESISTANCE LINE... A month ago it looked like gold might be on the verge of a bullish breakout. It didn't happen. My September 7 message showed gold nearing a test of a major "neckline" extending back three years. The weekly bars in Chart 1 show the Gold SPDR (GLD) having failed a test of that major resistance line (see arrow). North Korean tensions were rising during August and stocks were pulling back. In addition, the dollar was weak and money was flowing into safe havens like bonds and gold. The situation has improved since then. Stocks have rallied to new records, while the dollar and bond yields have been rising. That doesn't necessarily mean that the longer-term bullish story for gold is no longer valid. The shape of Chart 1 still suggests the gold is in the process of forming a major bottom. But its recent failure to achieve a bullish breakout means that its immediate threat to stocks has passed for now. That may be a more relevant story for next year.
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Chart 1
GOLD SPDR IS STILL IN AN UPTREND... The daily bars in Chart 2 show the Gold SPDR (GLD) still in an uptrend that started last December. Its recent price slide has brought it back to its 200-day moving average (red line) and a rising trendline drawn under its December/July lows. And it remains below its 50-day average. The chart suggests that the potential for an eventual upturn has been postponed, but not reversed. The same is true of gold stocks.
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Chart 2
GOLD MINERS ETF ALSO FAILED BREAKOUT TEST... The daily bars in Chart 3 show the VanEck Gold Miners ETF (GDX) also failing an early September test to rise above its February peak (see circles). That also prevented a bullish breakout. Since then, the GDX has also pulled back to its 200-day moving average. And it's fallen more than gold. The orange line in Chart 3 shows a ratio of GDX divided by the price of gold (GLD) dropping over the past month. That's another setback for the metal since it's usually led by its miners. If and when a bullish breakout does take place in gold, it will most likely be signaled by even stronger gold miners (in other words, a rising GDX/GLD ratio). The longer range chart for gold miners is in a holding pattern.
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Chart 3
GOLD MINERS ETF IS STILL CONSOLIDATING ... The weekly bars in Chart 4 show the VanEck Vectors Gold Miners ETF (GDX) currently in a holding pattern. After a strong first half last year when it reached a three-year high, the GDX lost two-thirds of those gains during the second half of 2016. It has spent the first ten months of this year in a sideways holding pattern. That holding pattern is taking place between the three Fibonacci retracement lines of 38%, 50%, and 62% of the 2016 gains which is pretty normal. To me, the overall pattern since the start of 2016 looks like an emerging uptrend. To get that uptrend started, however, the GDX needs to clear its two 2017 peaks (brown arrows). And as I've already suggested, that's more likely a potential event for 2018.
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Chart 4
GOLD IS STILL UNDERPERFORMING STOCKS ... Gold usually needs several things working in its favor to sustain a major upturn. One is a falling dollar. Another is low interest rates. A third is a weaker stock market. That's mainly because one of gold's main uses is a hedge against a weaker stock market. That being the case, one of the most useful ways to measure the value of gold is how it's doing relative to the stock market. And right now, it's not doing so well. Chart 5 is a relative strength ratio of gold divided by the S&P 500 (through Tuesday). Heading into September, the rising ratio showed gold starting to do better relative to the stock market. However, it failed a test of a falling trendine extending back to the middle of 2016, and a peak formed this August. The ratio is now testing the lows formed over the past year. A new low in the ratio would be a positive sign for stocks.
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Chart 5
GOLD/SPX RATIO STILL IN A DOWNTREND... One of the relationships that I've written about in my intermarket books is the one between the price of gold and the stock market. That's because it tells us a lot about both markets. Chart 6 plots a ratio of gold divided by the S&P 500 over the past two decades. The upturn in the ratio shortly after 2000 marked a dramatic shift toward gold, and signaled the start of the "lost decade" for stocks. The ratio rose sharply again during 2007 and 2008 as the financial crisis weakened stocks. The ratio finally peaked during 2011 and has been dropping since then. That's been good for stocks and bad for gold. [Gold rallied with stocks between 2009 and 2011 as the dollar dropped. Gold peaked in 2011 when the dollar bottomed]. The circled area shows the ratio in danger of resuming its six-year downtrend. That would suggest that the eight-year bull market in stocks has further to run. Historical studies confirm the importance of that relationship.
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Chart 6
LONGER RANGE LOOK AT STOCK/GOLD RATIO ... The next chart flips the ratio over by dividing the S&P 500 by gold. It's simply the inverse of the ratios shown in the two previous charts (and shifts the emphasis more to stocks). Chart 7 plots the stock/gold ratio back to 1970. For those of you not old enough to remember, the decade of the 1970s was marked by hyper-inflation with surging prices of gold and other commodities. [Fortunately for me, I was a commodities trader at the time]. Chart 7 shows the stock/gold ratio falling for ten years after 1970 (signalling another lost decade for stocks). After bottoming in 1980 (when the price of gold peaked), the ratio turned up sharply in 1982 (with stocks) and started a two-decade long bull market in the S&P 500. The peak in the ratio after 2000 marked a decade long shift out of stocks and into gold. The ratio bottomed in 2011 (when gold peaked) and is still rising. The trendlines drawn on the chart (with logarithmic scaling) help identify major turning points in the ratio. At the moment, the SPX/gold ratio is testing highs formed over the past year. A new high would put it at the highest level in ten years. While not perfect, ratio analysis between the two markets has been very helpful in determining major turning points for both. And until proven otherwise, the rising ratio still favors stocks over gold.
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Chart 7
NYSE PERCENT OF STOCKS ABOVE 200 DAY AVERAGE CLEARS 70%... Back on September 13, I suggested that that the percent of NYSE stocks above their 200-day average needed to start moving higher to support the rally in stocks. At the time, the number was only 62%. Chart 8, however, shows the $NYA200R having since rising above its July peak near 70% for the first time in six months. And it has a way to go to reach peaks formed in February (76%) and last September (80%). The percent of NYSE stocks trading above their 50-day average has also risen from 64% a month ago to 78%, which is the highest level in nine months.
