What Can We Infer From The Gold:Dow Ratio? (GLD, GDX, IAU, AUY, GG, ABX, NEM, KGC)
Przemyslaw Radomski: There is all the talk of Greece leaving the eurozone and we are already seeing a slow-motion runs on Greek banks. The Financial Times reports that €5 billion has left Greek banks in just the last two weeks and the more that Greek citizens feel it is possible that their country will leave the euro, the more incentive they have for pulling their money out and sending it abroad.
There are no rules in place for a country to leave the eurozone and it is anybody’s guess as to how severe the impact of such a move will be. These are uncharted waters and the sailing could get very rough. If Greece were to leave the eurozone, gold could initially fall on euro weakness and a flight to cash but the precious metal might then bounce due to a policy response of quantitative easing from central banks.
No one can predict how big the systemic contagion will be for Spain, Italy and their banks. In Spain, 16 banks and four regions have just been downgraded by Moody’s Investor Service. The point of no return may be approaching faster than anyone anticipated. Spain and Italy are too big to bail out if panic ensues after a “Greexit,” which is why European leaders would prefer that Greece, with all its problems, remain. A Greek departure is likely to be seen as the beginning of the end for the whole euro zone project. Greek voters still need to produce a functioning government innew electionson June 17.
New York Times columnist Paul Krugman compared the choice of Greece staying in Eurozone to the situation of Italy, where the north has had to subsidize the poorer south for many decades. He writes:
Italy’s currency union held together because the north made, and continues to make, large fiscal transfers to the south. Economists reckon these transfers to be around 4-5 per cent of Italian GDP. A flow of subsidies towards the south has had evil consequences: incomes have been maintained at uneconomically high levels, fostering unemployment. Large infrastructure and development projects have fuelled corruption, sustaining southern Italy’s criminal societies. Fiscal transfers helped Italy maintain its political unity but the cost has been enormous. From an economic perspective, the Mezzogiorno (Italy’s south) would probably have done better if it had stayed out of Italy’s monetary union.
Today, Greece stands on the brink of an exit from the euro. To avoid further sovereign contagion, the remaining eurozone members may find themselves pushed rapidly into a more complete fiscal and political union. The markets would doubtless applaud such an outcome. But if Italy’s example is relevant, the northern eurozone members could find themselves paying indefinitely a large tribute to the south. Economic divergences within the single currency area could become entrenched. Viewed from this perspective, a clean-break divorce might bring more immediate pain but in the end prove less costly than an unhappy marriage Italian style.
Meanwhile, central banks continued to buy bullion in April as Turkey raised its reserves by 29.7 metric tons and Ukraine, Mexico and Kazakhstan also increased their holdings, according to International Monetary Fund data.
Before addressing the title question, let’s begin this week’s technical part with the analysis of the S&P 500’s long-term chart (charts courtesy by http://stockcharts.com.)
Let us now move on to Dow Jones Transportation Average chart.
Now, let’s see how the financials did this week.
Finally, let’s take a look at the Dow:Gold ratio.
There are some bearish implications for gold here but these are limited since the breakout in the ratio has not yet been verified.
Summing up, the situation in stocks is a bit indecisive for the S&P 500 but other indices show signs that lower stock prices are to come. In addition to these charts, a note about fundamentals seems valid here. Companies which are strong generally act weak before periods of market decline, whereas those which are weak fundamentally can be seen to thrive during the final part of a rally. Apple, seen as a strong company moved lower on Thursday, whereas Facebook (seen as weak from the valuation approach) has moved higher in each of the past two days. If the “strong-weak” theory holds, lower stock prices would be in the cards. As has already been mentioned, there are some bearish implications for gold in the dow:gold ratio chart, but we need to wait until the breakout in the ratio is verified to consider them reliable.
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, we urge you to sign up for our free e-mail list. Sign up for our gold & silver mailing list 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 weekend and profitable week!
Related: SPDR Gold Trust (NYSEARCA:GLD), Market Vectors Gold Miners ETF (NYSEARCA:GDX), iShares Gold Trust (NYSEARCA:IAU), Newmont Mining Corporation (NYSEARCA:NEM), Goldcorp Inc. (NYSE:GG), Barrick Gold Corporation (NYSE:ABX), Kinross Gold (NYSE:KGC), Yamana Gold (NYSE:AUY).