The Amazing Story Of Gold To Gold Stocks Ratios

Tonight I would like to show you some charts from the PM complex we haven’t looked at in a long time. Some of these charts will look familiar to some of our long-term members as they were very helpful in the past to help us figure out what the PM complex was up to. This first chart is a ratio combo chart which has the GOLD:XAU on top and the XAU on the bottom. When the ratio is rising gold is outperforming the XAU. During the bull market years starting around 1999 or so the ratio would trade between roughly 5.10 on top, blue horizontal line, and 3.70 on the bottom, red hormonal line. When the ratio rallied up to the blue line around the 5.10 area it was a good time to back up the truck and buy your favorite PM stocks and when the ratio got down to the red line around the 3.70 it was a good time to sell your PM stocks.

That worked out very well until the crash in 2008 which changed everything in regards to the ratio chart. As you can see the ratio broke out above the blue horizontal trendline and rallied all the way up to 8.90 which was the highest this ratio had been in history. There was no way to know back then that this was the start of the massive underperformance of the XAU to gold or PM stock in general to gold. The ratio sold off down to the 6.00 area that reversed its role to what had been resistance at the all-time high for the ratio, to now support from above in September of 2009. The ratio chart on top finally topped out in its 20 years six-point parabolic arc in January of 2016 which began the baby bull market, yellow shaded area at the top of the chart. When that small double top broke down is when we took our first PM stock positions which at the time was a good buy signal. The price action sliced right through the parabolic arc like a hot knife through butter and things were once again good for the bull market in the precious metals stocks.

The brown shaded S&R zone was the first place we began to look for initial support, but the ratio broke down a little further and finally found support at the previous low at 12.50. Looking at that massive decline off of the double top high at 24.33 you can see why the 2016 rally was so strong, as shown on the bottom chart for the XAU. We got a nice bounce off the 12.50 area which looked like we could see the ratio start building out an H&S top but that wasn’t going to happen. As the ratio kept drifting higher and higher the XAU drifted lower and lower which brings us up to our current situation. Currently, the price action on the ratio chart on top is testing the top rail of a rising blue flag, while the XAU on the bottom chart is testing the bottom rail of its possible bullish falling wedge. To really get this rally going in the precious metal stocks we need to see the ratio chart on top break to the downside in no uncertain terms. If the ratio chart ever trades back into its old trading range between 3.70 at the bottom and 5.10 at the top the PM stocks should be massively higher than where they are trading today. The very first thing we need to see happen is for the blue falling wedge on the XAU to breakout and move higher in an impulse type of move. The setup is there now we just need to see some follow through to the upside on the XAU.

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