Sunday, November 25, 2007

Looking at Gold Through Another Lens -Part 2

Because gold is basically the US Dollar's nemesis, and vice versa, I thought I would show this relationship another way. To do this, I looked at the inverse of the US Dollar. The excellent website,, allows you to invert the price of any stock by taking the symbol '$one', and dividing it by the stock. Here is a chart that uses this technique:

The chart itself actually shows the price of gold, but we have the RSI of the inverted US Dollar on the top instead. The areas highlighted indicate the times where there is additional risk involved in holding gold. I feel that 5 out of the 6 signals given were fairly reliable. (By the way, I still feel that the US Dollar is in the process of bottoming short term).

Some of the past charts were a bit on the complicated side, which I am not sure is good or not. In any case, here is some traditional technical analysis on the Gold Stocks ETF, GDX:

This chart utilizes an easy to use moving average crossover system. Whenever the 9 day EMA crosses over the 20 day SMA, a buy signal is triggered and vice versa. This chart also shows a trend line that has just been broken.

Recently there has also been a bearish moving average crossover. I think I will stay bearish for as long these lines stay crossed. If they cross back, then most of the analysis I have done in the last few posts will be proven incorrect, and a loss will have to be taken, but that is the cost of doing business.

A moving average cross back is one possible scenario. Another possibility is that there will be another wave of selling, which would be a B wave for Elliott Wave folks out there. This would also complete a complex head and shoulders pattern that appears to be forming. I feel that both situations are possible, but that the latter is more likely.

The next chart is not directly related to gold, but involves the TSX. On the top panel we have the Japanese Yen divided by the Australian Dollar. On the bottom we have the TSX. I showed this relationship before, but this chart is a much longer term perspective. In fact, this chart goes back to the end of 2002, which is where the TSX bull market began.

I think a lot of people feel the bull market in stocks worldwide over the past 5 years has at least partially to do with the Yen Carry Trade. I do not think that the fact that these 2 charts are almost perfect mirror images of each other is a coincidence. What I find slightly worrisome is that the carry trade barometer in blue has, for the first time, not made a lower low. This could mean the carry trade is starting to dry up, and, if that is the case, it would not be beneficial to the TSX.

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