Dow-Gold Ratio: Blurry Picture

Includes: DIA, GDX, GLD
by: Gary Tanashian

Gary Tanashian submits: I thought I would take the pulse of the current Dow-Gold Ratio. Gold has recently done some very bullish things vs. the Dow as evidenced by the short-term (daily) chart. The trend has changed and bearish divergences have developed for stocks vs. gold. All's well apparently in Goldbugville. Not so fast...

Dow vs Gold 14 11 06

The weekly chart shows a different story. Stocks still have not met their secular downtrend line vs. the yellow metal, and in fact have not lost their uptrend. No sign of bearish divergence either.

Dow vs Gold Weekly 14 11 06

The U.S. Dollar is at a critical juncture and the bond market is trying its best to re-inflate Goldilocks (yield curve relentlessly declining). Combine this with a notable upturn in sentiment in the gold sector (newsletter writers are bursting with bullishness including some who were notably bearish until recently) and we have the makings of a correction at the least. Our targets of 605 +/- for gold and 309 to 319 for HUI are back in play. While stocks may simply decline less than gold, it would not be surprising to see additional upside here for all things paper.

At this point, I will call this an opportunity for a) buyers who missed the initial leg up to take gold sector positions and b) for the gold complex to shake off the fleas so to speak and eventually head higher with the strongest of holders. Meanwhile, prepare for some volatility. The word volatility is always easier to write than to sit through. Keep that in mind.

ETFs relevant to this analysis are: streetTRACKS Gold Trust ETF (NYSEARCA:GLD), Market Vectors Gold Miners ETF (NYSEARCA:GDX), Diamonds Trust Series 1 ETF (NYSEARCA:DIA), S&P 500 Index (NYSEARCA:SPY) and iShares Lehman 20+ Year Treasury Bond ETF (NYSEARCA:TLT).