Battle of the Titans

Some weeks ago, this analyst published an article which drew attention to the relationship of gold shares to the gold price.

The argument then was (and still is) that Baby Boomers are becoming fixated on cash flow and gold juniors in 1999 and 2000 may soon start to become cash flow positive - even at prices of gold below current levels.

The argument went something like this: If investment starts to dribble into these juniors of yester-year because they are reaching the stage where they will emerge from "explorer" to "producer", their investment rating is likely to change. We may see them starting to rise across the board.

If the $XAU and the $HUI start to rise relative to the gold price, this might give rise to an unintended consequence. Investors may come to argue: "Gee, look the shares are bottoming and/or rising. That usually precedes a bottoming and/or rising in the gold price itself"

Result?: Self fulfilling prophecy.

So let's have a look at the relationship charts. (Charts courtesy stockcharts.com)

The juniors, by and large, are reflected by the $HUI. The relationship chart of the $HUI to $Gold above seems to be giving off some conflicting signals, the most important one of which has been a crossover to the downside of the MACD and its Moving Average to a level below previous support.

The chart itself seems to have been hovering (and holding) above the 0.48 level since July. Arguably, the pattern on this chart is that of a descending right angled triangle - which is typically bearish.

Is the downside penetration of the MACD a sign of things to come?

The reader's attention is drawn to the relationship of the 50 week to the 200 week Moving average. The 200 week MA, whilst still pointing up, seems to be flattening, but the 50 week MA is still above the 200 Week MA. Arguably, the market is reaching for a critical point of decision. The ratio "needs" to break up from here for the bull market to remain intact.

Let's have a look at the ratio of the more well established gold counters to gold - at the $XAU:$Gold relationship. What is the relationship of its MAs to one another.

Interesting: In this case, the 200 week MA is much flatter, and the 50 week MA penetrated on the downside twice before: Once in April 2006, and once again in January 2007. At face value, it's weaker.

But hang on a second. There are two "clues" coming out of this chart. First, there is a non-confirmation in that the ratio chart has been falling and the MACD line - which recently broke "up" - has not.

Second, the falling ratio seems to have been falling within a wedge pattern, which might be bullish (if the Primary Trend of the gold universe is bullish).

Interim conclusion

There is tentative evidence to support the argument that the nature of the gold universe has been changing in the past few months. The "little guy" seems to have been getting twitchier, whilst the "serious investor" seems to have been holding his nerve.

Is there any evidence that the serious investor is growing bolder (as opposed to merely holding his nerve)?"

The daily chart (daily charts are typically not particularly reliable indicators nowadays, and should therefore be treated with circumspection) is showing tentative evidence that the worst may be over.

Note the rising bottoms on the ratio chart since mid March, and the flattening 50 day Moving Average.

Just for the sake of professionalism, and to show a balanced view, lets have a look at the same daily chart of the $HUI:$Gold

There has been an interesting little non-confirmation in the past week. Note how the ratio chart fell to a new low, but the corresponding low of the MACD was slightly higher than its previous high.

Interim Conclusion

Investors in gold shares seem to be looking for a bottoming of the relationship ratio of gold shares to gold.

Now, let's take a quick look at the gold price itself: (Chart courtesy ino.com)

At face value, this chart is worrying. It has shown two sell signals - one by having broken below its Moving Average and, a couple of days ago, by breaking below a rising trendline.

All of this begs the question:

Why is it that the gold price itself is giving off sell signals, but the gold shares relative to the gold price are giving off tentative signals that the ratio may be looking for a bottom?

Conclusion

The two gold "camps" - the Central Bankers who 'manage' the gold price, and the Investors who need to place investment money and/or protect themselves - seem to be squaring off to face one another.

Some humour

Place your bets folks. Will the Central Bankers win this round or is your money on the Investment Community?

Right now, the outcome is a gamble, but my guess is that if the Dow Jones pulls back sharply to breathe, the gold shares will get caught in the down draught. The ratios might start giving sell signals.

Are you the bacon or the egg in this Battle of the Titans? Are you a pig or a chicken? You see, the chicken was involved. But the pig? Well, he was committed.

Clue: The Central Bankers may be pigs, but they are not chicken.

My bet (for this round) is on the Central Bankers, who are predisposed to want to kill the patient with kindness.