The Critical Point for Gold

Oh dear. Your editor has returned from a short holiday in Hobart to find the gold market in a shambles. The yellow metal fell 5.68% on Friday and closed under US$1500. It’s the first time it’s done that since 2011. Is gold’s 12-year winning streak over?

Let’s look at it with our own indicator. According to our data, everything is proceeding according to plan. Far from being the end, or even the beginning of the end, we’re somewhere near the end of the middle…of the bull market.

So what lies in store for gold? Well, as you may know, we’ve been tracking the ratio between the spot gold price in US dollars and the more common ‘B’ shares of Berkshire Hathaway. The thinking is simple: as stocks become the preferred method for investors to beat the inflation and/or front run the money printing of the Federal Reserve, shares will strengthen relative to gold. But how much? Check out the chart below.



In late February, we reckoned the gold price would decline to US$1400 as the Gold/Berkshire ratio declined to long-term support at 14. Well, as you can see below, Friday’s shellacking sent the ratio below 14. The current gold price is around $1440, or about half a day’s work of falling prices, at current rates.

You’ll note a few other things on the chart. The Relative Strength Index is at 20.20. That indicates the ratio is deeply oversold. That means either Berkshire shares are due to fall or that the gold price is due to rise. Either way, now is a critical point.

Of course, the argument from the soft-brained people in the mainstream media is that gold is neither an inflation hedge nor a deflation hedge and therefore is a loser’s game after 11 years of fooling everyone. Exactly why anyone would trust to hold their savings in paper money after the last five years is a mystery to your editor.

But the world is full of strange and stupid people. We’re happy to admit we’re at least one of them and probably both. But if the indicator above is any…indication…the gold selling is over-done. Markets tend to over-shoot in both directions, however. And we could be wrong about a great many things.

For now, beware the doom sayers! They bring ill tidings with little understanding. Tomorrow, you’ll see how even modern artists agree with us. Until then…

Dan Denning
for Markets and Money

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From the Archives…

China’s Credit Boom Krakatoa
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Gold vs Bitcoin
10-04-13 – Greg Guenther

Is Cyprus More Important Than You Think?
9-04-13 – Satyajit Das

Our Largest Asian Trading Partners Are in Trouble: China and Japan
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Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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