Gold’s Sudden, Newfound Relative Strength
Three weeks ago we discussed how gold needed to perform considering the US$ index was likely to bounce due to an oversold condition and extreme bearish sentiment.
We wrote: “Simply put, gold will have to prove itself in real terms if it is going to hold its ground or breakout as the US$ begins a likely bounce.”
The US$ index has enjoyed only a slight rebound but gold has maintained its 2017 US$ weakness induced gains because of its strong relative performance. Below we plot the daily line chart of gold and a number of ratios: Gold against foreign currencies (Gold/FC), gold against equities and gold against bonds. Since the July low, gold has showed good nominal and relative performance.
The key has been the strong rebound in Gold/FC and the breakout in Gold/Equities. Gold/FC has broken above two trendlines and is now testing its 200-day moving average. Meanwhile, Gold/Equities has broken above one trendline and has regained its 200-day moving average. It would be very bullish for gold if Gold/FC pushed through its 200-day moving average while Gold/Equities pushed above trendline 2. Those moves would likely accompany a gold breakout through $1300/oz but more importantly, they would put gold in a position of trading above its 200-day moving average in nominal terms and against the major asset classes (stocks, bonds, currencies).
Although gold failed to break above $1300/oz today (Friday), it remains in position to do so because of its renewed strength in real terms. As long as the US$ index does not rally hard, we expect gold to break above $1300 and reach $1375. The gold stocks as a group have been lagging recently but in the event of a gold breakout, we foresee significant upside potential as the group could play catch up.
Jordan Roy-Byrne CMT, MFTA
Jordan Roy-Byrne, CMT is a Chartered Market Technician and member of the Market Technicians Association. He is the publisher and editor of TheDailyGold Premium, a publication which emphasizes market timing and stock selection, as well as TheDailyGold Global, an add-on service for subscribers which covers global capital markets. He is also the author of the 2015 book, The Coming Renewal of Gold’s Secular Bull Market which is available for free. TheDailyGold.com was recently named one of the top 50 Investment Blogs by DailyReckoning and WalletHub.
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