Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Silver Outlook Is 'Excellent' - 23rd July 19
Why The Coming Silver Rally Might Be The Greatest - 23rd July 19
We Are in for Decades of Ultra-Loose Monetary Policy - 23rd July 19
Gold & Gold GDX Stocks Ripping. What’s Next? - 23rd July 19
Stock Market Breadth Warning Signs for the Stock Market’s Rally? - 23rd July 19
U.S. Recession Watch: The Six-Cycle Forecast - 23rd July 19
US Dollar Index tightly wound between: US Bond Yields down on safety flows - 23rd July 19
Stocks Bull or Bear? The Market’s Message - 23rd July 19
This Dividend Aristocrat Is Leading the 5G Revolution - 22nd July 19
What the World Doesn’t Need Now is Lower Interest Rates - 22nd July 19
My Biggest 'Fear' For Silver - 22nd July 19
Reasons to Buy Pre-Owned Luxury Car from a Certified Dealer - 22nd July 19
Stock Market Increasing Technical Weakness - 22nd July 19
What Could The Next Gold Rally Look Like? - 22nd July 19
Stock Markets Setting Up For A Volatility Explosion – Are You Ready? - 22nd July 19
Anatomy of an Impulse Move in Gold and Silver Precious Metals - 22nd July 19
What you Really need to Know about the Stock Market - 22nd July 19
Has Next UK Financial Crisis Just Started? Bank Accounts Being Frozen - 21st July 19
Silver to Continue Lagging Gold, Will Struggle to Overcome $17 - 21st July 19
What’s With all the Weird Weather?  - 21st July 19
Halifax Stopping Customers Withdrawing Funds Online - UK Brexit Banking Crisis Starting? - 21st July 19
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Gold Timing, Gold:Bonds Ratio Matters Over Bond Yields' Ratio

Commodities / Gold and Silver 2011 Feb 11, 2011 - 04:33 PM GMT

By: Przemyslaw_Radomski

Commodities

Best Financial Markets Analysis ArticleInflation vs. market fluctuations is always a hot topic in precious metal markets. Inflation is good for gold, which has a long history of acting as a hedge against it. With rising inflation it is likely that there will be a corresponding rise in the price of precious metals; that brings us to the question, how do you value gold? It is evident that there is no scientific method for valuing gold since it’s a non-earning asset. Perhaps we should value gold by “1/n, where ‘n’ is investor confidence in paper currencies. But how do you measure ‘n’?  Let’s have a look into the history.


In Babylonian times it was said that an ounce of gold bought some 350 loaves of bread. According to our source known as The Bread Lady in Miami, the average price of a loaf of bread in the U.S. is about $1.70, which suggests a fair price for gold of about $595. But hold on! We are not sure this comparison is valid. The Babylonians had organic whole wheat bread, which would cost a lot more today than $1.70, more like $5.00 per loaf, which would make the price of gold $1,750.

Another rule-of-thumb says an ounce of gold could purchase a decent men’s toga in Roman times and a gentleman’s suit today. The quality of tailoring is not spelled out but you can certainly get a good quality suit for over $1,300. 

Since 1900, an ounce of gold on average (which means that during declines in precious metals silver declined more, and during upswings silver rallied more – and the ratio was more favorable to silver investors than 50 to 1) could purchase 50 times its weight in silver. After last year’s run-up of silver, this ratio has fallen to 47 times. The price of gold in terms of oil has also been fairly constant. Since 1900, an ounce of gold has purchased on average 13.4 barrels of oil. Today, the same ounce buys 15.5 barrels.

These are the historical explanations for gold ‘valuation’. However in the recent past, interest in analyzing influence of currencies and bonds on gold prices has increased substantially. One of our Subscribers recently asked if the current breakout in the yield spread between short-term and long-term bonds is meaningful to precious metals investors. He further asked if it changes anything from the fundamental perspective, for instance that inflation was no longer a threat to the economy.

Our comment here is that long-term fundamentals are driven by the fundamental situations of the markets themselves not the short-term technical signs. These are used to time the market not analyze the economy. The economy is analyzed by economic indicators, major trends, demographics, industry analysis and other analyses which is more of a top-down approach. Prices reflect not only fundamental but also emotional factors, and that’s why technical analysis is so useful while timing the market.

However, it cannot by itself change the fundamental outlook. Once we see a breakout, we cannot automatically infer that it was because of a change in fundamentals – it could have been caused by emotional factors, or it could have been just an accident. Printing presses around the world are hot from printing money and the inflation remains a long-term threat.

Let’s begin this week's technical part of our analysis by taking a look at the chart featuring aforementioned yield spread between short-term and long-term bonds (charts courtesy by http://stockcharts.com).

We took a lot of time to thoroughly review the chart above and even analyzed it from the perspective of the rate-of-change indicator for the bond yield spreads. No important implications were uncovered for stock, nor Precious Metals Investors.

There were times when such a quick rally meant a local bottom for metals; there were times when it meant a local top, and times when it meant absolutely nothing. Consequently, seeing such event doesn’t provide us with much information.  Overall, we infer that the analysis of the yield spreads does not appear to be a useful analytical tool for the Precious Metals Investors as far as timing is concerned.

However, there are other markets that have had - at times - key influence as far as timing is concerned. One of these markets is the currency market and the USD-EUR pair. Let’s start true technical discussion with the current influence of Euro – USD indices on gold moves.

In the short-term Euro Index chart this week we see sideways movement and there remains a bearish outlook. A small increase in index levels that we’ve seen this week should not be viewed as bullish, in fact, it resulted in the right shoulder of the bearish head-and- shoulders pattern being formed. These implications will naturally result in a bullish sentiment for the USD Index as seen on the next chart.

In the long-term USD Index chart this week we can see that index levels have barely moved since last week’s update. We have, however, seen a small decline which appears to be verifying the upper support line and is therefore not a bearish indicator. No breakdown has been seen. At this point the bottom appears to be in and the trend appears bullish. Based on the strong correlation between gold and USD in recent weeks, short-term suggestion is a definite “buy” for gold.

Next, let’s see what would bonds proffer at this juncture - however not in terms of spread between yields, but as a ratio  - bonds relative to gold prices. The ratio between the price of gold and corporate bonds once again provides us some valuable insight into the latest developments. The following chart describes the ratio between gold and Dow Jones Corporate Bond Index.

The ratio has recently touched a support line and has now moved higher, actually exceeding the 2008 spike high. This is an important development and from this point the odds slightly favor a continuation of the big rally that we've seen in the second half of 2010.

Moreover, from a non-USD perspective, gold has bottomed close to the rising long-term support line and also close to the 50-week moving average. This is a trend, which has been seen fairly often in the past and usually points to a subsequent rally. Most importantly, no evidence of a breakdown has been seen and the outlook for gold from a non-USD perspective is therefore bullish for the short term.

Summing up, once again the outlook is bullish for the USD Index and slightly bearish for the Euro Index. Since precious metals have been trending with the dollar in recent weeks, the implications for gold, silver and mining stocks are also short-term bullish. Gold:bonds ratio also suggests that the previous rally might continue. Of course there's more to the golden story this week, but we will leave that part of our analysis to our Subscribers.

To make sure that you are notified once the new features are implemented, and get immediate access to my free thoughts on the market, including information not available publicly, I urge you to sign up for my free e-mail list. Sign up today and you'll also get free, 7-day access to the Premium Sections on my website, including valuable tools and charts dedicated to serious PM Investors and Speculators. It's free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

P. Radomski
Editor
Sunshine Profits

    Interested in increasing your profits in the PM sector? Want to know which stocks to buy? Would you like to improve your risk/reward ratio?

    Sunshine Profits provides professional support for precious metals Investors and Traders.

    Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits’ Premium Service gain access to Charts, Tools and Key Principles sections. Click the following link to find out how many benefits this means to you. Naturally, you may browse the sample version and easily sing-up for a free trial to see if the Premium Service meets your expectations.

    All essays, research and information found above represent analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Mr. Radomski and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above belong to Mr. Radomski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Radomski is not a Registered Securities Advisor. Mr. Radomski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published above have been prepared for your private use and their sole purpose is to educate readers about various investments.

    By reading Mr. Radomski's essays or reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these essays or reports. Investing, trading and speculation in any financial markets may involve high risk of loss. We strongly advise that you consult a certified investment advisor and we encourage you to do your own research before making any investment decision. Mr. Radomski, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Przemyslaw Radomski Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules