Here's the Call
Don't we all wish we could know what we know today but bring that information back in time and then really clean up? Well, we can't, but for the purposes of this analysis the next best thing is a combination of history, logic, simple math and of course, charts. Now that Stockcharts.com is finally back up and running, I got right down to hitting the ratio charts after the impulsive reversal in the Gold-Silver ratio. It felt as though something important happened yesterday and indeed I think did. Giving credit where it is due, Bob Hoye and his staff and Steve Saville have been very aware of the Gold-Silver ratio and its implications for a long time. I have simply gotten behind them and am drafting. We will use the GLD-SLV ratio as a proxy here as Stockcharts has not yet updated yesterday's gore fest in the metals. When gold starts to out-perform silver, it can be a signal that a pronounced economic contraction is upcoming. It will be important to confirm that this is a trend in the making and the impulsive nature of this move argues that it might be.
For further evidence that something is afoot in the speculative playground where most participants do not even question the idea that liquidity will continue in abundance, we look at the old reliable yield spread represented here by the $TNX-$IRX ratio. It appears the bond market is getting a bit spooked relative to the Fed's ability to maintain their inflation hawkish stance. A spooked bond market is not a liquidity engine. Let's see if this break above resistance holds. Edit (12/17/06) based on an email received: Note that we are talking about long rates rising relative to short rates; interest rates can decline with short rates declining faster than long while the spread rises.
Since it is always important for investors to keep the big picture in focus, here it is for the bond market on a monthly chart.
Finally and importantly, let's get to the call mentioned in the title. I may well be wrong here and as I always say on the Blog, please do feel free to fade this analysis at will, but as of this writing this is the game plan as I see it. As always and especially in the world of financial voodoo, it is subject to change. We will ease into the call for the next few weeks by first presenting a chart of the Dow from the time of the Gold-Silver Ratio's reversal in April to the current status of wonder market and confounder of many market watchers and the public alike. Notice that the rise to the May peak off of the GSR reversal was 5%+.
Now take a look at the all important Dow-Gold Ratio chart that is often harped upon on the Blog. While I think gold and the miners are in a sustainable rally pending the completion of the current correction (see the targets I have laid out on the Blog for GLD/gold, XAU, HUI and the USD), I have been nagged a bit by the idea that according to this chart the Dow had a little unfinished business on the upside in its counter the major trend rally vs. gold. Again we use GLD as the proxy here.
A strong case can be made that nominal GLD is headed for support in the 59/60 area which would satisfy the above noted 216/217 area resistance level in the Dow-Gold Ratio at, drum roll please............Dow 13,000! In fact, a 5% rise in the Dow (similar to the one in April/May) immediately following Friday's Gold-Silver Ratio reversal brings us to 13,067. So there you have it. Get your party hats and noise makers ready. I will allow for a week or two after the new year begins and then look for a major correction similar to that of May and June or more likely, a resumption of the secular bear market in gold terms and quite possibly, nominal terms. Meanwhile, I expect the beat to go one. The players will have offloaded to the greedy, inexperienced and simply naive. Wash, rinse, repeat as they say. One final note; I am expecting the precious metals complex to head higher soon after the above noted gyrations take place just as they did in 2001 following the previous major yield curve bottom. Additionally, that "shorting opportunity of a lifetime" that everyone is looking for may be mere weeks away, although that is always risky business.
I am not an investment advisor so by all means fade me at will in favor of more conventional and comfortable views. Also, please review Biiwii.com's terms and conditions located here http://www.biiwii.com/about.htm. This is a "call" the likes of which I have never done and may never again attempt. But it is a sincere effort to portray something that hit me over the head as striking.
Best of luck.