What I Am Looking At While Waiting For A Major Breakout In Precious Metals (Or For Godot*...)

In my opinion, there is a good chance that precious metals will finally break above the latest cyclical tops established in July / August 2016.

However, to do it, gold has to be stronger than the US dollar using an absolute measure. Or, in other words, applying the concept of the goldollar index:

source: Simple Digressions

As the chart shows, most recently gold and the goldollar index have bounced off their strong resistance (two horizontal lines and blue arrows). In my opinion, a major breakout will be only valid when both instruments break above their resistance at the same time (more or less). It means that a prudent speculator should closely watch the way gold and the goldollar index perform.

As always, the devils is in the details but at this point the issue is quite simple. As long as gold and the goldollar index do not break together - be careful.

* - "Waiting for Godot" - a play by Samuel Beckett

Gold And The GolDollar Index

One of my readers has asked me about the Goldollar index. Here are the updated two charts:

Long-term picture

source: Simple Digressions

Note that most recently the Goldollar index has bounced off its long-term trend line and now it is marching higher.

Short-term picture

source: Simple Digressions

However, in the short term there is quite a big divergence between gold and the index (which, generally, go in tandem). Gold has crossed above its strong resistance (the blue circle) while the index is still below a similar resistance level. It looks like a short-term correction or a stall in gold prices is in the making.

Gold Dollar Index Says That Gold Was Accumulated During Its Last Correction (Or Bear Market Phase)

Not many analysts use the gold dollar index to show the relative strength of gold. But this indicator is of some quality. Let me cite Chip Anderson of Stock Charts:

"Generally speaking, gold and the dollar have an inverse relationship - a rising dollar causes the price of gold to decline and vice versa; however, supply and demand pressures also influence the price of gold, but it is often difficult to see them. For this we use the GolDollar Index.

The GolDollar Index was invented buy Tom McClellan (www.mcoscillator.com), and is calculated by multiplying the price of gold by the U.S. Dollar Index. 
Its purpose is to cancel the effects of currency fluctuations on the price of gold. By comparing it with the spot gold index we can determine if there is inherent strength/weakness in the price of gold"

Now, the chart. Firstly, a long-term chart:

                                source: www.stockcharts.com


The chart shows that the current bull market in gold started in 2001 (yellow area) and its first phase ended in 2013. Then we encountered a medium-term correction (or, some say, a bear market) in gold prices.

However, this correction (or a bear market) was accompanied by a rising relative strength of gold, expressed by the GolDollar index. Let me show it:

                           source: www.stockcharts.com

The yellow area comprises a period of lower gold prices (the upper panel of the chart - red line) accompanied by an increasing relative strength (lower panel and the up trending red line). Well, it looks like the last correction was the time when gold was accumulated - hence, the last strong rally in gold (and all gold related issues). 

On the other hand, Technical Analysis says that the gold is currently below its strong resistance, expressed by the blue line at the bottom panel of the chart. 

Will the Gold Break At Last?

Today gold was at a tiny distance from breaking above its strong resistance level but...it failed.

However, the current move still looks good:

 source: Simple Digressions

The chart shows the goldollar index and gold prices. Note that this time both instruments go in tandem, which validates the current move in gold prices.

Gold Prices Breaking Above Their Strong Resistance

Today gold broke above its strong resistance at around $1,250 - $1,260 per ounce. The importance of this move has been additionally confirmed by other measures. Let me start from the golddollar index:

To remind my readers:

“The GolDollar Index was invented by Tom McClellan (of McClellan Financial) and is calculated by multiplying the price of gold by the U.S. Dollar Index. Its purpose is to cancel the effects of currency fluctuations on the price of gold. By comparing it with the spot gold index we can determine if there is inherent strength/weakness in the price of gold”

The blue circles are indicating today's breakout - note that the gold and the golddollar index did the same (they broke above their resistance marked in violet). 

Another picture:

This time it is the inverted US dollar index chart. As a rule, gold and the inverted US dollar index go in tandem. If something different happens it may be an indication of the relative strength of gold or the inverted US dollar index. The chart shows that now gold is much stronger than the inverted US dollar index (note that gold is above its strong resistance but the inverted US dollar index is not).

Another graph:

Now it is gold against 10-year US treasury notes prices. I believe that 10-year US treasury notes are a good proxy for real interest rates (excluding inflation).

Lower real interest rates (and higher prices of US treasury notes) support higher prices of gold. So, as a rule, gold prices go in tandem with the prices of treasuries. However, as the chart shows, gold is once again stronger than treasuries - it did break above its strong resistance while the prices of treasuries did not.

Summarizing - gold is very strong now. Its price goes up without bothering about the US dollar. What is more, it is also stronger than US treasuries so it looks like we are ahead of another rally in gold...

In The Long- Term Gold Has Been Stronger Than The US Dollar

Contrary to what the gold bears think, in the long - term the gold has been stronger than the US dollar. Look at these three charts (as of the end of January 5, 2017):

1. US Dollar:

For better comparison, I have plotted the inverted US dollar index . The inversion means that if the US dollar index goes up, the inverted chart line goes down.

Since December 2015 the US dollar has strengthened so the blue arrow has been in its downward trend.  

2. Now, gold:

As a rule, if the US dollar index goes up (or the inverted US dollar index goes down - chart 1) gold should go down as well. However, the chart shows that since December 2015 the gold has strenghtened (the blue arrow has been in its upward trend).

3. Next (and the last) chart - golddollar index (the definition of the golddollar index is here):

Similarly to gold, the goldollar index has been trending up since December 2015. However, this index has been even stronger than the gold itself. Simply put, the gold expressed in other currencies (than the US dollar) shows extra strength.

Summarizing - the gold bears are looking for lower gold prices but gold is showing its intrinsic strength...

Are Copper Prices Ahead Of A Correction?

It looks like a short-term divergence between copper prices and the copper dollar index is in the making. Look at these two charts:

source: Simple Digressions

To remind my readers, the copper dollar index is built in the same way as the Goldollar index:

"It is calculated by multiplying the price of copper by the U.S. dollar Index and its purpose is to cancel the effects of currency fluctuations on the price of copper. By comparing it with the spot copper dolar index an analyst can determine if there is inherent strength/weakness in the price of copper"

Now, as a rule, copper prices and the copper dollar index go in tandem. However, if there is any divergence between these two instruments, caution is advised.

The two blue arrows on the chart above show this pattern. A few days ago copper prices broke above their resistance at $2.78 per pound but the copper dollar index is still below a similar resistance level. If I am correct, copper may start its correction soon.
  

Something For Gold Bugs

Today a nice chart for the gold bugs:

source: Simple Digressions

The chart shows that the very long - term trend line (the beginning in 2005), drawn by the gold dollar index, is still holding.

If anybody is not familiar with the gold dollar index - here is a definition:

“The GolDollar Index was invented by Tom McClellan (of McClellan Financial) and is calculated by multiplying the price of gold by the U.S. Dollar Index. Its purpose is to cancel the effects of currency fluctuations on the price of gold. By comparing it with the spot gold index we can determine if there is inherent strength/weakness in the price of gold”

As the chart shows, now we are very close to the trend line...

Silver - The Big Selling Has Just Started

Gold bulls are definitely excited. As the chart below shows, most recently gold and the goldollar index got very close to their strong resistance. What is important, both instruments did it in tandem:

source: Simple Digressions

Additionally, a silver / gold ratio made impressive breakout supporting a bullish thesis on the precious metals market:

source: Simple Digressions

However, my advise is simple: do not even touch this market. In my opinion, a prudent speculator should stay away from gold in particular. Why? Well, in the long term there is no pivotal change here - gold still cannot break above its resistance at $1,350 - $1,375 per ounce and each short-term upswing is followed by a counter-action. In other words, in the long-term we see the same old story (consolidation period) and in the short-term the game is quite primitive: buy gold when it is 2% - 3% down from the recent ultra-short-term top and sell when it hits the $1,350 - $1,375 zone.

Last thing - a few days ago JP Morgan started its typical game. After a long period of silver accumulation the bank (or, better said, somebody storing silver in the JP Morgan warehouse at the COMEX) started selling silver bullion. This game is also very simple - the excited silver bulls started buying silver bullion en masse and higher demand was met with appropriate supply. As a result, in just four days the bank withdrew 3.0 million ounces of silver from its warehouse:

source: Simple Digressions

In other words, silver bulls should keep in mind that there is somebody to satisfy their hunger. What is more, he has a lot of silver...

Gold At A Pivotal Point

Gold prices are very close to their strong resistance level at $1,350 - $1,380 per ounce:

source: Stockcharts.com

A thesis on a final breakout is supported by the physical demand. For example, the IAU ETF has added a large amount of gold in January up-to-date (465 thousand ounces):

source: Simple Digressions and IAU

On the other hand, the Goldollar index is lagging (the blue arrow) behind gold prices (the green arrow), which is a sign of a short-term correction coming:

source: Simple Digressions

Summarizing - we are at a pivotal point for gold. Although I opt for a short-term correction, I would not be surprised to see a big leg up in gold starting soon...