We all have experienced the results of a significant decline in the XAU, gold and silver. The dollar has now rallied sharply. Let’s see where we stand now and what the weight of the evidence suggests.
XAU Market Health Indicator
The XAU Market Health indicator is a measurement of price change, price range and trend. It shows the underlying character of any trend in any time frame. See the weekly chart below.
This indicator has now formed potential base pattern in the weekly chart. However, it has not reached anywhere near the new all time highs as recently demonstrated by the prices of gold and silver.
A positive trend in this indicator will come but only after a considerable period of backing and filling activity. Clearly, more work needs to be done and that will take some time to accomplish.
On a positive note, the primary weekly Trend Directional and Gravity Center indicators continue in a positive alignment. They are our primary guide to the performance of the XAU and may go a long way toward resolving the trend in the Market Health indicator.
Silver – The Math is Quite Simple
Silver was rocketing higher with an increase of 2.8x in 9 months. It has now formed a major top.
From a different perspective and on any chart, one can see that the recent price near 49 was at least 1.80x its 200 day moving average. This is a price ratio that is considered excessive. With the recent decline, it has now improved to about 1.25x its 200 day MA. Gold’s ratio at 1.10x is a more reasonable level.
As a side note, no matter what your entry point, anytime a particular investment position exceeds 100%, the math becomes quite simple. An investor can take half off the table and let the rest ride for free. For example, if you have 00 invested in any investment and it becomes worth 00, one can sell 50% (00) and the remaining 00 is now risk free.
This is the same protocol we use in the Pendulum Trading System to achieve low price core positions in our Portfolios over and over again.
This is not to say that silver is not a great investment with excellent fundamentals and prospects. Clearly, it has these characteristics. It is simply a matter of the math and a total no brainer for consistent profits.
HUI/Gold Ratio
In cyclical analysis, gold/silver stocks were ahead or at least matching the speed of gold/silver 5 years ago. Now we are on the back side of that curve while hedge funds and other characters short these stocks while buying gold/silver instruments, the so called hedge fund ratio spread trades.
Many exploration stocks require periodic financing. Short sellers also know that additional financings will be required due to their cash burn rate which will further depress the price, so they jump on those too for easy money. All these financial fads, of course, do not usually have a long shelf life.
A further depressant is company share issues. Many companies have issued a huge number of shares in recent years for various reasons. One example is NovaGold (NG) whose shares have increased by 2.4x the number it had 3 years ago. Clearly, a rise in the value of the underlying assets is required just to maintain share value.
The basing platform now emerging on the right side of the HUI/Gold ratio is somewhat positive long term (weekly basis) but is not definitive just yet.
So what is going to change the short selling and ratio trades? I am not quite certain as to the complete answer when this activity will end but suspect it will be connected to the US dollar. If and when the dollar falls through its major support area at 72, it may help trigger the HUI/Gold ratio to a more substantive bullish posture. Only the timing is at issue. Further insights on this subject from Trader Dan Norcini can be located here.
Dollar Prospects
As noted previously, money flows have been going into the stronger currencies in the recent past.
Most interestingly, an April 20th front page article in the Wall Street Journal entitled "China Speeds Yuan Push" noted the following: "Further evidence that Beijing is reducing its reliance on the dollar came Monday (April 18), when a state run agency reported that 7% of China’s foreign trade in the first quarter was conducted in Yuan, up from .5% a year earlier." China wants to reduce its dollar reserves as well.
The dollar may find some support from gradually increasing interest rates over time; however, we are still in a negative return rate, as noted by many authors.
These developments say it all as to the future trend and use of the US dollar and they are all continuing trends that bear watching. The dollar has had a sharp rally but its future and prospects are definitely limited given the background picture noted above.
For additional commentary on the S&P500, gold/silver, oil, dollar and related markets, click here.
Conclusion
The XAU Market Health indicator trend is not yet favorable and the gold/silver markets have had a major selloff. The HUI/Gold ratio is still negative and the dollar is rallying from a very oversold level.
The weight of the evidence leads me to believe we will have a continuing back and fill to sideways price action in all these markets for a good period of time, possibly to July. This will allow these markets and indicators to build a platform for a significant launch when seasonality factors are more favorable. It simply is a matter of time and patience.
