Critical Test for Gold

Gold has had a nice run in the last few months but as the chart below shows the yellow metal seems to have faltered lately.



A divergence and critical test
One indicator I like to watch is the ratio of the CBOE Gold Index (GOX) to the PHLX Gold & Silver Index (XAU). GOX is an equal weighted index, which means that the more speculative and smaller capitalization names have greater weight in the index. By contrast, XAU is a capitalization weighted index, which means that the larger capitalization stocks have greater weight. The performance of the GOX to XAU ratio is a measure of the degree of speculation in gold stocks.

As the chart of the ratio shows, the small caps have been in a steady uptrend against the large caps since August 2008, which indicates rising speculative sentiment. With the downturn in the gold market, the ratio came down to test the uptrend line. So far, the test has been successful. The continued existence of this relative uptrend could be a positive divergence for the gold market.

Watch this space for the direction on gold and inflation
Investors should watch this space as a key indicator of the health of the gold market. A continuation of the relative uptrend is an indication that there is speculative sentiment still holds the upper hand and this is just a pause in the gold bull.

I would prefer not to anticipate how the readings on indicators turn out. If I were forced to make a call, I would lean towards being a gold bull. My reasoning is other indicators of inflationary expectations such as the inflation swap rates are continuing to rise.

Comments

[The Geoffster:]

No nation in history has survived fiat money. -Ronald Reagan
www.marketoracle.co.uk...

Apr 09 12:27 PM

[Vuke:]

"Critical" test for gold? Where is it going to go? Somewhere away?

Given the great increases in exploration and development costs gold is not going to fall much and given the expectations and reality of inflation its future price will be much higher.

Apr 09 01:13 PM

[arlin:]

Your $ GOLD shows a head and shoulder pattern.
the 38% fib is at 883,and gold is continually testing it.The 50% is at 844 and the 61.8 is at 805.
GDX has been very weak lately,and my feeling is with the recovery in the banks,and related markets,that gold may test those fibs in the near future.The" fear" part of the market for gold may be over for a while.I am still long term bullish on the precious metals.However in the short term I am thinking a shakeout is overdue and the deeper the better.

Apr 10 09:56 AM

[Fabien Hug:]

I agree with Arlin. The fear factor is receding and inflation is still far away. I keep some physical gold and GGN but don't touch gold mines for the moment.

Apr 10 02:40 PM

[Allan Frain:]

I like the author's chart, but could this not be interpreted as a vulnerability ?

Bring on the next dip before the physical and paper markets decouple !

Apr 11 02:59 AM

[arlin:]

It's early here and after a strong cup of coffee........re-looking at your chart looks like a huge complex inverted H&S pattern,with the potential for a 200+point move higher.......I think as long as the 200ma holds or we don't break below 850 area this pattern is valid long term.
So short term bearish h&s,longer term looks very bullish as long as the pattern holds

Apr 11 06:24 AM

[arlin:]

It's early here and after a strong cup of coffee........re-looking at your chart looks like a huge complex inverted H&S pattern,with the potential for a 200+point move higher.......I think as long as the 200ma holds or we don't break below 850 area this pattern is valid long term.
So short term bearish h&s,longer term looks very bullish as long as the pattern holds

Apr 11 06:24 AM

[5142152-337:]

...and your point is?????

Apr 11 06:52 PM

[capt Brian:]

yeah, what the heckers was said here, did I miss something, oh nevermind, I'm going to bed. Tomorrow maybe someone or something will make sense, [don't look here for it]

grins to ya

Apr 11 11:39 PM

[arlin:]

I think if the 850 area holds,the inverted head and shoulder has a good chance.


On Apr 11 06:52 PM 5142152-337 wrote:

> ...and your point is?????

Apr 12 08:48 AM