Last week when we covered rebound targets in the precious metals sector we
also discussed the importance of Gold's performance in real terms. It can
be a leading indicator for the sector at key turning points. Since then precious
metals sold off in aggressive fashion alongside global equity markets. However,
Gold against equities gained materially. This is something to keep an eye
on as it hints that a trend change is boiling under the surface.
In the first chart we look at Gold in nominal terms and against various equity
markets.
Gold has pulled back after its rebound from $1080/oz to $1160/oz. It has resistance
at $1160 and $1180 and support at $1080 and around $1000. We continue to
believe Gold's most likely path is down to $1000/oz before the bear market
ends.
Although Gold's rebound from $1080 could be over, its outperformance of stocks
could be starting. We plot Gold against the all-country index (ACWI), the
NYSE and emerging markets. Gold relative to each market gained roughly 20%
from the start of the month through Monday. Gold relative to emerging markets
already broke out to a new high while relative to the others Gold tested
important resistance.
The equity markets have rebounded strongly this week but it is not much of
a surprise given the previous sharp decline. We posted
a chart a few days ago that argued for a bounce. The strong bounce over
the past few days has not changed the broader technical condition which is
negative.
Below we plot the NYSE, ACWI and EEM with their 400-day moving averages. The
first two lost the 400-dma only a few weeks ago. Each has rebounded but traders
and investors should be advised that as the market nears previous resistance
it becomes susceptible to another leg down. If new lows are on the horizon
then we would turn our attention to NYSE 8500 and ACWI $46 which mark a confluence
of strong support. Emerging markets have led this move lower and have more
downside potential. If the US market has new lows ahead of it then EEM has
downside risk to the low to mid $20s.
Gold breaking its downtrend against equities could be the last thing that
needs to happen for its bear to turn to bull. Another move lower in equities
could trigger that break. We've written about how Gold has already bottomed
against foreign currencies and how it's nearing an all time high against
commodity prices. However, Gold relative to the equity market continued to
decline and make new lows right alongside Gold in nominal terms. There has
been a strong negative correlation for four years. The relationship as of
a few weeks ago may have begun to shift in Gold's favor. If that continues
in the weeks and months ahead it certainly would have positive implications
for precious metals and precious metals companies.
