Ever since gold broke below critical support back in April, you’ve been inundated with statistics, price targets and countless charts. There’s certainly no shortage of gold analysis these days.
But today, I want you to forget everything you’ve read about gold over the past eight months. Forget about production statistics, inflation guesses, or jewellery demand in Asia. Heck you can even discard the annotations on every other gold chart you’ve seen this year…
The most important gold chart in the world right now is the long-term look at the Dow/gold ratio – the Dow Jones Industrial Average priced in gold.
Today, it will cost you about 13 ounces of gold to buy the Dow. That’s a long way off the almost 45-ounce price tag on the Dow back in 1999…
This chart goes back far enough to see the very end of the massive gold spike in 1980, followed by the Dow regaining its footing before beginning a 20-year run. It’s pretty obvious what happens when the Dow finally breaks higher after years of decline versus the yellow metal.
‘Priced in gold, the Dow had been in a massive 13-year bear market,‘ explain the analysts over at Chart of the Day. ‘However, back in the summer of 2011, gold peaked while the Dow continued to rally. While the Dow (priced in gold) is currently well-off its dot-com record highs, it has been surging as of late. The current rally has resulted in a break above resistance of its latest downtrend channel as well as new post-financial crisis highs.‘
What we’re seeing right now is a massive performance shift. After more than a decade in the driver’s seat, gold is giving up ground to stocks.
A change in trend is brewing. Don’t get caught on the wrong side of the market.
Gold’s looking bad. But miners are looking much worse.
I’ve written to you about the temptations to ‘bottom pick’ the miners on multiple occasions this year. Sure, it might work for a quick trade or two. But any long-term bets on this group remain out of the question, as far as I’m concerned.
Yes, miner sentiment is absolutely terrible right now. And that can be a contrarian signal to buy. However, there are simply too many factors holding miners down right now to make it worth the risk. In fact, there are still plenty of investors who remain ‘in love’ with these stocks, according to Frank Zorrilla, founder and chief investment officer of Zor Capital.
‘The Market Vectors Gold Miners ETF has now slid 55% YTD to a five-year low,‘ Zorilla notes, ‘yet the fund has nearly doubled in size to $6.8B, as investors have added $2.5B despite the dismal performance.‘
Yikes. Looks like some investors just love the pain…
Zorilla continues:
‘Based on this information one can argue that the miners have a long way to go before they form a true bottom if one believes that bottoms are formed when there’s despair. That does not mean that they won’t have sharp rallies every now and then but it’s obvious that there is a very big love affair with the miners even though they have done nothing but disappoint.‘
Gold’s been incredibly volatile lately. Do yourself a favour and avoid the miner ETFs on the long side. Things will probably get worse before they get better…
Greg Guenthner
Contributing Editor, Money Morning
Publisher’s Note: The Most Important Gold Chart in the World originally appeared in The Daily Reckoning USA
