Metals: Gold & Silver

By Louise Yamada Technical Research Advisors, LLC ("LYA")

March 8 (King World News) - We’ve had quite a few concerned client calls on Gold recently.  The Gold spot price (GOLDS- 1,576.23) declined as the weak technical profile discussed last month carried price down through 1,600 support to 1,564, which slightly breached the downward channel’s lower boundary, depicted herein last month, before bouncing back.  A kickback rally could carry up again toward 1,650-1,660, the upper channel boundary and the intersect with the 50- and 200-day MAs.  The larger question is whether Gold can hold critical two-year support at 1,539 (1,522 intraday).

The weekly and monthly momentum readings (see Figure 12, arrows) remain on strongly declining Sell signals still suggesting weakness may not be abating.  Any breach of 1,564 could bring the critical support at 1,539 (1,522 intraday) to a test.  Were the strength in the U.S. dollar (which generally moves inversely to Gold) to continue, this could weigh on Gold’s price.  Were critical support violated, there could be a further retreat in Gold toward even 1,400, and would eliminate our more symmetrical observation (see Figure 12, left, saucer) which has argued technically for the 17-month consolidation to resolve into Q1.

Currently, on the weekly chart, Gold is effectively in a wide trading range between 1,529 and 1,800. If the symmetrical consolidation results as the effective resolution, the timing may need to extend into Q2, and support would need to hold with momentum flattening and price eventually would need to move through 1,700 to suggest another upward assault.  Unfortunately, Gold’s immediate intent appears weaker rather than stronger....

Dow / Gold Ratio:

The Dow / Gold Ratio (see Figure 13) is a longer-term relationship observation for Gold and equities.  When the ratio line is rising, the Dow (stocks) is outperforming Gold; when the line is falling, Gold is outperforming stocks.

When the Dow slipped into a structural bear market decline in 2000 (having violated an 18-year uptrend) and Gold began developing a four-year base, we referenced this statistical relic.

The Dow / Gold ratio allows quantification, not only of the relative vulnerability of the Dow from its peak in 2000, and the upside potential for Gold, but also recognition of the potential duration of these structural trend reversals.

The Dow / Gold ratio, represented here back to 1900 (left), was one of the early studies we examined in identifying the developing structural bear market for equities in 2000-2001.  Putting current equity market price action in historical perspective versus Gold, is interesting:

1. 1)The ratio has peaked for only the third time in the recorded history from an historical high level of 42, and so far the ratio has traversed an ever-widening “megaphone” pattern between 1.33 and 42.35, in which the peak ratios have grown larger, and trough ratios have grown smaller. The ratio has fallen sharply since 1999, during which Gold has outperformed stocks.
   

2. 2)Notice that the peaks occurred in 1929, 1966 and 1999, all corresponding to both the end of each U.S. structural bull market in equities, and the initiation of each structural relative bull market in Gold.
   

3. 3)Note, too, that the troughs occurred with a ratio of nearly 1 to 1 or 2 to 1, corresponding to the price lows near each structural bear market in equities (peaks in Gold price): When the ratio troughed in February 1933, the Dow was near 51 and Gold was fixed at 32; in June 1980, the Dow was near 932 with Gold approximately 653.
   

4. 4)The current ratio downtrend (Gold outperforming, Dow underperforming) has been in place since 1999.  Even as the Dow (in nominal terms) traced out a five-year uptrend from 2002-2007 to new reaction highs, those moves are barely reflected.  Gold declined, but outperformed the equity market and provided a safer haven into the 2008-209 decline, as well as offering a better return (outperformance).
   

5. 5)From each peak to trough, the time elapsed has spanned 15 years to achieve those ratio levels in each cycle (in line with the general duration of structural equity bear markets of 13-16 years).  The current ratio has thus far declined only to 8.9, over 13 years (close to the 15 years above)....
   

If we look at a close-up of the current trend in the ratio (see Figure 14), notice the saucer that appears to be developing (which has penetrated the 2001 downtrend) and appears poised to turn up (in favor of equities).  Could this be suggesting that Gold price will breach the recent support (noted above) and that the Dow will lift through the 2007 peak to new all-time highs?  The potential base bears some resemblance to the base that developed into 1980-1982 (see left saucer) just as stocks were about to embark on the last new structural bull market.

The last 18-month consolidation for Gold in 2008-2009 does not show up on this ratio chart as a basing configuration, but the current 17-month consolidation in Gold is looking like a potential base.  Is it possible that the ratio could make a structural shift at a ratio of 8:1 rather than falling to the 2:1 ratios of history?  Could the Fed action alter the ratio turning level?

We as technicians can only ask questions based on the charts.  The answers will be revealed over time, but if a question can be answered “yes,” we have to pay attention.

We can note also on the longer-term chart (see Figure 13 above, right hand side of chart) that similar basing took place in 1980.  But we could also note that there could have been an end to the trend in 1975 when the ratio bounced up before making the final low in 1980.  So the current basing potential may also prove premature.  Nevertheless, at the moment we feel one should keep in mind the possibility that the trends may be structurally shifting again for the ratio and protect positions accordingly....

Silver: Breaks 2008 Uptrend; Descending Triangle Ominous.

Silver spot price (SILV-28.60) fell to a new six-month low, breaking the 2008 uptrend line and the 40- week MA, suggesting a test of the critical 27 support may lie ahead (see Figure 15 below, left hand side of chart).  A breach of 27 would again bring 25 into play as a target.  The monthly profile (see Figure 15, right) carries a distinct and ominous descending triangular formation suggestive of further decline, even back to the 22 support from 2010.  Monthly and weekly momentum models continue down on a Sell, suggesting more risk ahead, notwithstanding interim bounces.  Resistance lies at 30 (the broken uptrend and intersect with the MAs) and 32, followed by 34-35.

King World News Note:  For KWN readers around the world you have to understand that Yamada has to call it as she sees things technically.  On a purely technical basis the weakness in the gold market has created vulnerability on the charts.  We have seen this technical vulnerability in these markets many time before because of the active government manipulation of both the gold and silver markets, only to see the markets rebound strongly and reenter a bullish technical structure.  What Yamada is saying here is the markets need to show her significant strength before they move into a solidly bullish structure.  Until that occurs the markets remain vulnerable here.

As Managing Director and Head of Technical Research for Smith Barney, Louise was a perennial leader in the Institutional Investor poll, and was the top-ranked market technician in 2001, 2002, 2003 and 2004, before going independent.  To subscribe to Louise Yamada Technical Research Advisors, LLC ("LYA") CLICK HERE.

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

The interviews with Jim Sinclair, John Embry, Gerald Celente, Dr. Stephen Leeb, Rick Rule, Ben Davies, Andrew Maguire and Marc Faber are available now.  Also, be sure to listen to the other recent KWN interviews which included James Turk, Egon von Greyerz, Felix Zulauf, Eric Sprott and Art Cashin by CLICKING HERE.

Eric King

KingWorldNews.com

To return to BLOG click here.

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast,

rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

next >

< previous

Contact Us:

KWN Disclaimer: