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How The Golden Dow Leads The Market at Trader’s Narrative

To be honest, gold’s relative strength has surprised me. Since we last looked at the precious metal, my analysis suggested that we would be facing a moribund and perhaps ebbing market.

In fact, gold has rallied above its $1150 swing level and is now challenging the December 2009 peak. Gold stocks have also kept pace with the Gold Bugs index keeping pace with the commodity.

Here’s a chart of gold priced in a basket of currencies:
G10 gold index CitiFX Apr 2010
Source: CitiFX Technicals

The large head and shoulder pattern which completed last year suggests at least a $1300 target area. CitiFX seems to be suggesting this:

  • The chart above is gold equally weighted against the G10 currencies
  • The bullish break this week should take the market to at least the highs
  • The correction down and then the consolidation that followed over the past year does not seem that dissimilar from the price action in 2006–2007

Apart from the obvious implications this would have on the gold and gold stock markets, there is another way to look at this. Here’s an interesting chart from EWI which implies that the Dow Jones priced in gold leads the unadjusted Dow Jones index:

nominal real Dow long term chart EWI
Source: EWI’s Free Gold and Silver eBook.

I’m sure you’ve already seen your share of Dow or S&P 500 indexes adjusted for gold. But I had never seen the two of them together suggesting that one is leading the other.

For me, this isn’t the strongest case for a secular bear market. We already have a myriad reasons for operating under the framework of a cyclical bull market within a longer term, secular bear market. For example, the 18 year cycle. But nevertheless, this was a neat chart and I wanted to share it with you.

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One Response to “How The Golden Dow Leads The Market”  

  1. 1 Babak

    Just to add, the breadth for the gold stock sector is really stretched right now with more than 80% of the XAU constituents trading above their 100 day moving average. Usually that means a correction or at least a pause before any continuation.

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