Wednesday, November 18, 2009

Dow:Gold Ratio update

in late February I made what at the time was a very contrarian forecast. I said that I expected the Dow to outperform the price of Gold over the 'tradeable future'. that was probably one of my better calls this year.

but then after the Dow:Gold ratio made its initial, vigorous advance I decided to press my luck and forecast an even higher level for the ratio. with Dow:Gold trading around 9/1 (this was in late May or June, if I recall) I forecast a further advance all the way up to 12/1.

well the ratio did end up advancing more, but it only got to about 10, before starting to drift lower the past several weeks.

now we are back around 9 and everyone is wondering why we didn't hit 12 like I promised. two possible answers here; either my forecast was in error, or the game ain't over yet.

after looking at the charts again it seems to me that the decline from 10.1 to 8.97 can be viewed as a normal retracement within a (potentially) much larger advance. take a look at this chart:

notice the support found right around the confluence of the .382 price retracement and the .57 speedline. and in terms of time the retracement was about 2/5 the length of the initial advance from 7 to 10. none of these numbers are out of line with proportions typical of counter-trends.

so in round numbers the ratio advanced 3 points (from 7 to 10) then dropped a point (from 10 to 9). I don't see any reason why it can't advance another 3 points higher (from 9 to 12) from here.

now some of you might be scratching yer heads, thinking, wah? I thought that Trend & Value dude was bearish on stocks now! how can this self admitted goldbug (so he says) make these outlandish comments that the Dow can hit 12 ounces of Gold? nonsense!

well, I will say it's a sketchy call, but I have my reasons. the purpose of this post was just to see if my reasoning had been invalidated by recent price action. the answer is No, Not Yet. and I don't just change major outlooks wily-nilly, so the 12/1 forecast stands, at least for now. if something changes, I'll let you Know.