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A little while ago I tried to separate the effect of the weakness in the US dollar on the price of gold to determine whether gold’s bull market could actually stand on its own: US Dollar’s Weakness or Gold’s Strength?
There is a better index out there to determine this very question. The Kitco Gold Index is the price of gold measured not in terms of US dollars, but rather in terms of the same weighted basket of currencies that determine the US dollar index: Euro (57.6%), Japanese Yen (13.6%), UK Pound (11.9%), Canadian Dollar (9.1%), Swedish Krona (4.2%) and Swiss Franc (3.6%).
So instead of pricing gold in the unit of a US dollar, the chart below charts it in the the same unit that we use to measure the US dollar index:
Source: Kitco Gold Index
This is the one year comparison but you can also see a 5 and 10 year chart (follow above link). These both tell the same tale. There is definitely a bull market in gold. But, it has been aided and abetted to a large degree by the weakness in the US dollar. Seen through the lense of other currencies, the gold bull is much more tame.
If you look at a very long term chart of the comparison, it becomes obvious that there are periods where the price of gold in US dollars shoots up only to come back in line with the currency basket. Right now is one of those times.
As you can see, the price of gold in the currency basket has yet to breach the high it set earlier this year. This was something I pointed out when others were focusing on the breaking of the nagging $1000 resistance: Major Non-Confirmation in Gold.
Also, the purest equity proxy for gold, the Philadelphia Gold Bugs Index (HUI), has yet to surpass its highs from last spring (March 13th 2008 - 515). According to the k-ratio analysis of the gold sector, this suggests that gold is ‘overvalued’ relative to gold stocks.
Last week we looked at the breadth of the gold stocks which showed about 80% of them closing above their short term moving average. Here’s an updated chart:
While gold stocks managed to eke out another positive day, breadth slipped from almost 90% to below 80%. Usually, in the past, when breadth has been this stretched, and heading down, there is a good chance that a short term top has been already made.
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