Precious Metals Puzzle (Charts Of the Day 7).

Gold Strengthens As Inflation Weakens?

 

Gold appears to have formed a bottom of sorts, but the reason is a bit of a mystery.

Precious metals have proven to be a durable LONG RUN hedge against the ravages of inflation and other financial crisis.

However, Gold lost much of its luster in that regard after the 2008-9 Financial Panic.

Back then, Gold plummeted from more than $1,000 an ounce to about $700.  The perception of Gold as a “Safe Haven” plunged as well.  As a result, Gold’s value as an investment has been questioned.

The Factors Which Normally Drive Gold Prices Higher are ABSENT

Gold typically advances in response to a falling Dollar or rising Inflation.  NEITHER IS CURRENTLY PRESENT.

The Slide Show below has the most recent and historical trends in the Dollar, Oil and Commodities in relationship to Gold prices.

These are the key takeaways:

  1. The Dollar Index has been advancing all year, although it is now just above its Up Trend Line.  Gold’s advance since August has occurred against a largely stable to advancing Dollar.  
  2. Gold has historically tended to be POSITIVELY correlated to Oil, but NOT recently.  Gold has risen while Oil has plunged.
  3. The Gold/Oil ratio, now at about 30, is VERY HIGH, having occurred only a couple of times in the last half century.  By this metric, either Gold is OVER-valued or Oil UNDER-valued on a RELATIVE basis.
  4. Oil prices and Commodity prices overall are at or near MULTI-Decade lows.  The prospect of any near-term rise in inflation would seem virtually nil.

(Charts courtesy of https://stockcharts.com and https://macrotrends.net.)

Silver Has Finally Confirmed The Gold Move….

 

 

In yesterday’s trading, SLV finally broke out above $14 to turn its pattern short-term BULLISH.  This is the only data point which is supportive of a BULLISH advance of any kind in Gold.

Silver normally LEADS, but this time is lagging.  

….But Gold and Silver Miners Have Not

 

 

Companies that mine Gold and Silver have yet to confirm or corroborate the move in Gold. 

This casts suspicion on the validity of the strength in Precious Metals.

 

 

Gold’s LONG TERM Picture Is More Bullish

The recent rally is not concrete enough to justify a large position in GOLD.

However, GLD has MAJOR RESISTANCE at $130.  A solid break out ABOVE this level would indicate the beginning of a LONG TERM BULL MARKET in GOLD.

However, a break BELOW $110 would be quite BEARISH.

What Else Might Gold Be Telling Us?

Gold’s strength in this environment is most unusual.  If it’s not reflecting rising inflation, then why the recent advance?

Only two possibilities come to mind:

  1. Gold is anticipating a WORLD CRISIS such as war or some sort of military confrontation.   Or….
  2. Gold is looking WAY into the future.   If the economy is deteriorating as quickly as the stock markets suggest, the Federal Reserve will be compelled to begin an EASING cycle MUCH SOONER than most think.  This future easing will be INFLATIONARY to reverse the damage from DE-flation.

Precious Metals may turn into an opportunity, but NOT yet.  Gold and Silver have disappointed their fans (like me) for many years, but at some point the circumstances will be ripe for A MAJOR BULL MARKET.  GLD will have to exceed $130 to warrant additional exposure to the Precious Metals sector.

Beware Sharp Bear Market Rallies

Keep in mind, that 1000 point stock market rallies, like yesterday, ONLY occur in BEAR MARKETS or in the middle of Waterfall Declines.  Bear Market Rallies have a UNIQUE SIGNATURE.  A great REFRESHER on Bear Market Rallies can be found here:  “Characteristics Of Bear Market Rallies”.  (https://markonomics101.com/2018/10/17/characteristics-of-bear-market-rallies/).

In this environment, Capital Preservation and maintaining liquidity are key.  The best opportunities occur when most investors are desperate for liquidity.   If you aren’t liquid, you won’t be able to take advantage of the situations that will present themselves as the Waterfall Decline continues to reach its low.

Whether you are liquid or not, the BEST INVESTMENT is INFORMATION.  We strive to provide the best, most accurate and insightful market information anywhere.  Invaluable, yet FREE.

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