Gold Ratios Suggest A New Leg Higher To Commence

This week, we will revisit two key gold ratios: Dow/Gold and Nasdaq/Gold. In a bonafide bull market, Gold will substantially outperform these stock indices, which the yellow metal has done overall since the year 2000. It has been a bumpy road for these ratios over the past quarter-century, but Gold's largest gains have come when we've seen waterfall declines in the ratio. Those next waterfall declines may soon be upon us.

We'll start with Dow/Gold and note the familiar wedge I've shown before that began taking shape in 1980. The support line that connects the 1980 and 2011 lows has been the ultimate line in the sand for the Gold bull market, which is astounding to think about given the big gains we've seen already in Gold inside the giant wedge. A waterfall decline below key support is where I've always suspected we would see the Gold bull market ultimately make its final blowoff move, and that might be starting to take shape now. Earlier in the year we saw this support line give way, only to be followed by a backtest over the past several months. This is healthy technical action, and ideally we would see the ratio fall away dramatically from here, accelerating Gold's gains. The only thing we need to be wary of would be a possible inverted H&S forming here, something I am keeping an eye on but is not my base case scenario.

The second chart is that of Nasdaq/Gold, which I have defined as a huge descending channel. Note that the ratio fell out of a large ascending broadening wedge within the last couple of years, which is often a bearish technical pattern. Price then backtested the underside of the wedge before forming what looks like could be a double top. All the signs are there for the ratio to continue with a violent fall from here, which would be extremely bullish for Gold.

The last six months have been painful for metals investors as Gold and Silver have been digesting huge gains. These ratios tell us that the wait may soon be over, and new highs could well be upon us before the end of this year.