The XAU/GOLD Ratio
(Update)
Stacy M. Himes
Two strong weeks in the XAU have produced a breakout on the ratio chart. As I suggested in the previous analysis the Gold and Silver charts have both suffered technical damage such that it could have been construed a serious breakdown was in progress. The action in the ratio chart suggests this is not the case. This footprint has been present in this gold bull market at various bottoms from the start. The metal charts must look dangerous for the shares to put in a cyclical bottom. The real question now is are we about to enter a significant bull market impulsive wave, or is this move just another move to resistance that will ultimately fail. Of course I don't have that answer, but I think the ratio chart has shown us that the 0.28 area is very tough resistance and provides a good guide for timed sales.

I do find the ADX indicator status very interesting at this juncture. The indicator was primarily designed to reveal trend strength, and it is clear that this ratio chart has had a very week trend for some time now. You will also note there was not a real capitulation move in the ratio value. That of course makes sense with this very flat ADX line. In my opinion this is a clue that pressures are building up and setting the stage for a large rise in trend strength. This time period seems analogous to the 2000 period prior to the launch of the bull market. I am not suggesting with certainty that the next move is another major wave set up. There very well could be a clearing event related to the USD short position prior to a significant rise in gold. The USD chart has broken the falling wedge to the downside. This classical throw-over often precedes reversals. In any case we are officially on a buy signal in gold shares now. Just watch the chart carefully and don't get too greedy.


S.M. Himes

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July 16, 2007