In spite of the breathtaking rally we have recently witnessed in gold, in spite of the primary bull market that was signaled in gold on August 22 by the Dow Theory (*) which has been commented ad nauseam in this blog, in spite of QE, there remains a nagging question: Is really gold so strong?
If you look at the table below and go to the column “unrealized gain” you will see that both the SPY and SLV (silver) have experienced a larger price gain since the primary bull market started for each of them. Gold, until, now has been underperforming.
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DOW THEORY PRIMARY TREND MONITOR SPY
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SPY
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Bull market started
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06/04/2012
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128.1
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Bull market signaled
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06/29/2012
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136.1
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Last close
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09/14/2012
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147.24
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Current stop level: Bear mkt low
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128.1
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Unrlzd gain %
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Tot advance since start bull mkt
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Max Pot Loss %
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8.19%
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14.94%
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6.25%
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DOW THEORY PRIMARY TREND MONITOR GOLD (GLD)
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GLD
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Bull market started
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05/16/2012
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149.46
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Bull market signaled
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08/22/2012
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160.54
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Last close
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09/14/2012
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171.8
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Current stop level: Bear mkt low
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149.46
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Unrlzd gain %
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Tot advance since start bull mkt
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Max Pot Loss %
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7.01%
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14.95%
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7.41%
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DOW THEORY PRIMARY TREND MONITOR SILVER (SLV)
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SLV
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Bull market started
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06/28/2012
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25.63
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Bull market signaled
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08/22/2012
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28.92
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Last close
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09/14/2012
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33.6
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Current stop level: Bear mkt low
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25.63
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Unrlzd gain %
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Tot advance since start bull mkt
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Max Pot Loss %
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16.18%
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31.10%
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12.84%
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Furthermore, if you look at the chart below you can see that the famous Gold/Dow ratio has been favorable to stocks, that is, stocks have shown more relative strength. Even though, since the inception of the gold primary bull market in gold on August 22, gold has retraced some of the ground lost in the ratio, you can see that the GLD/DIA ratio is still below its previous secondary correction highs. In other words, gold until now hasn’t been able to show a significant increase of relative strength. In Dow Theory jargon we’d say we are just witnessing a secondary reaction against a solidly entrenched bear primary trend of the ratio.
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| Gold/Dow ratio: Bearish in primary trend. Bullish in secondary trend |
On the other hand, the SLV/DIA ratio has neatly exceeded its previous secondary correction highs. In other words, without question silver is stronger than gold. See the chart below:
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| Silver/Dow ratio: Bullish in primary and secondary trend. But primary bullish trend unconfirmed by Gold/Dow ratio |
However, one of the tenets of the Dow Theory is that any signal needs confirmation. Hence, we see gold still struggling to break the previous relevant high in the ratio, whereas silver has broken out into new ground.
Bottom line:
1. Silver is stronger than gold in the medium term (let’s say 3 months time frame).
2. Silver is stronger than stocks in the primary trend (let’s say 2.5 years), however, lack of confirmation by the GLD/DIA ratio makes me cautious as to making long term assertions.
3. When the GLD/DIA finally confirms the SLV/DIA ratio, then the odds favor real fireworks in the precious metals universe, since the primary trend of both ratios will be confirmed as bullish
Am I saying that I consider suspect the primary bull market trend in gold? No, not at all. The primary trend in gold as per Dow Theory is bullish. However, what I am saying is:
1. Gold is far from displaying all its potential strength. It is a laggard, albeit a very profitable one, among a sea of super turbo performers.
2. The effectiveness of QE seems kind of muted for gold.
3. When the GLD/DIA ratio enters a primary bull trend, then we can see substantial price gains for gold as usually the laggard catches up.
