Gold has set new highs in US Dollar terms, but is lagging both in terms of other currencies and in the share price of gold miners.
After recently setting the all-time-high price of $1435.70/oz, Gold stands at a pivotal juncture between a continued price increase and a big potential reversal. Struggling to hold above $1430 from October to December 2010, Gold entered a quick but relatively-shallow correction. It has since recovered all of its losses and broke out to new highs. But a few divergences and inconsistencies stand in the way of Gold, and may be warning of upcoming trouble: the price of gold in terms of other currencies and the Gold miners ETF (GDX) have not yet reached new highs.
Gold in US Dollar vs Gold in Other Currencies:
click to enlarge
Gold has made new highs in US Dollar terms, but has not done so in a number of the other currencies. Kitco has devised a Gold index based on a basket of currencies that make up the US Dollar.
Here is how Kitco describes it:
The Kitco Gold Index has one purpose, that is to determine whether the value of gold is actual, a reflection of changes in the US Dollar value, or a combination of both.
The U.S. Dollar Index® represents the value of the US Dollar in terms of a basket of six major foreign currencies: Euro (57.6%), Japanese Yen (13.6%), UK Pound (11.9%), Canadian Dollar (9.1%), Swedish Krona (4.2%) and Swiss Franc (3.6%). It is an exchange traded (FINEX) index and has become a standard used worldwide.
The Kitco Gold Index is the price of gold measured not in terms of US Dollars, but rather in terms of the same weighted basket of currencies that determine the US Dollar Index®.
According to Kitco's index, then, Gold is yet to make new highs in unanimous fashion; it is still lagging in terms of other currencies. And unless it can break out to new levels in a decisive way, we may currently be approaching the next phase down.
Gold vs. Gold Miners
Another warning signal that a potential top is in place for gold prices is the divergence in Gold Mining stocks. The broad ETFs that track the miners are the GDX and GDXJ. After making new all-time highs in December 2010, the miners also entered a correction and have since recovered some of their losses. But while Gold has recovered all of its losses and even broken out to new highs (at least in US Dollar terms), the miners have failed to do so, and have even dipped for the second time since attempting the recovery.
Compare the new highs in the Gold ETF (GLD) with the failure in the Gold Miners ETF (GDX): 
While many investors, both large and small, have jumped into the gold theme, they are currently sitting on much more risk and hope than they probably believe themselves to be. Gold is even starting to show weakness as a "safe-haven" play, as prices have not responded well to the Middle East and Japan turmoil. With the serious multitude of reasons pointing us to a Gold Bubble that may be about to burst, or at least eventually leave many investors with large losses, these divergences both in gold prices based on other currencies and in the gold miners should be paid very close attention to as a potential early warning.
Disclosure: I am short GDX.
