The Time To Buy Gold And Short General Equities Is Near

Gold is now very near our long anticipated target buying range of $855 to $823, and the S&P 500 is getting overbought, though it may push up to the 930-945 range (which should represent an excellent shorting opportunity). Crude oil remains trapped between $37 and $56, and the Japanese Yen is showing potential signs of starting to strengthen again.

Below is a ratio chart of the gold price versus the S&P 500 Index - broadly representing the overall U.S. stock market. Most equity markets worldwide also fall or rise roughly in line with the S&P 500 index. The higher the ratio, the more gold is worth compared to the equity market.

It would not be outside the norms of history if gold eventually reaches a 5:1 or a 10:1 ratio against the S&P 500 (years from now). Plenty of chart analysis and twisting turns will take place on the way there, however. At this point it is to a large extent little more than a plausible speculation based on the expected madness of governments and central banks in printing enormous amounts of paper currency to fund massive and misguided bailouts, as well as attempts at artificially stimulating demand in the economy.

Based on our calculations: When gold hit its peak in January 1980, the Gold/S&P ratio hit 7.9. When the stock market hit bottom in July 1932 (and gold was still fixed at $21 per ounce - the Gold Standard), the Gold/S&P ratio hit 5.3.

The ratio appears to be in a very strong, long-term bull market. The anticipated correction in the ratio back to 1.00 has now taken place. This indicates that we have either already arrived at or are close to a likely good opportunity to exit and/or short the general equity market and once again go long gold (or add to existing positions). As can be seen from the chart, even a more severe correction back to 0.80-0.75 would leave the bull market fully intact. At what level the S&P or gold would be if the ratio corrects that far is uncertain - it will likely be a combination of the stock market rising further, perhaps to S&P 930-945, and a deeper correction in gold toward 730-680. We do not believe this to be the most likely scenario, and continue to expect a bottom in gold between $855 and $823.

Gold Nears The Expected Support Range

After nearing the record high from March 2008, gold entered a correction. As previously stated, we expected that gold would meet significant resistance at this level, and a correction back to support in the range from around $855 down to the weekly record close from 1980 at $823 appeared likely before a final breakout above $1000 / $1033.90 potentially takes place. Corrections usually have two legs down that are similar in size, and the second leg down has taken gold to just above our anticipated target range. Gold may very well enter our targeted buying range next week.

This would represent a normal correction of about 50% of gold's move up from its October 2008 low. If gold has a weekly close one percent or more below $823, a retest of the $681 low may take place.

U.S.

and World equity markets are in multi-year downtrends. At present, the current rally has pushed through our anticipated resistance from 850 to 860 for the S&P 500. Many individual stocks and indices are now near significant resistance, so although the market may run up to test the 930-945 range, we are closing many of our long positions rather than risk holding on too long. For anyone long the S&P 500, we recommend tightening stop loss orders to just below 830.

When the current bounce fizzles, the most plausible target range for the next intermediate bottom for the S&P 500 remains around 620-580 and 5900-5500 for the Dow Jones Industrial Average.

For the S&P 500 (chart below), note the significance of the 200 day (43 week) moving average. It tends to offer stiff resistance during major downtrends (a good example of which can be seen during the 2000-2003 bear market), and is currently located at 968, rapidly declining further into the 930-980 resistance range. The plausibility of breaking 980 any time in the next several months has significantly diminished now that the 200 day (43 week) moving average has fallen so far.

Once the market hits a final bottom, all the moving averages are eventually certain to be broken through to the upside, but that may be another year or more away from happening. For example, during the 2000 to 2002 bear market, the S&P took 31 months from the peak to the ultimate low (down 51% from the peak). During the 1929 to 1932 market collapse, the Dow Industrial Average took 34 months to hit bottom (down 89% from the peak). So far, the S&P is only 17 months into its current bear market.

When the S&P and most other major world indices eventually successfully clear both the 200 day (43 week) and 300 day (65 week) moving averages, we are likely to see - at the very least - a cyclical bull market lasting a couple of years, and - depending on how things turn out - possibly a new major bull market lasting several years.

More than anything, the longer-term outcome may depend on the future world energy situation. Will there be sufficient crude oil and natural gas production? Will (and can?) alternative energy sources be scaled up quickly enough to compensate for potentially declining world oil and gas production? For now, the start of any kind of bull market (and not just a multi-week or multi-month bounce) is likely well into the future, but these questions will quickly take center stage when the world economy attempts to resume its growth. The level of the oil price - measured both in terms of paper currency and in ounces of gold - will likely be the single most important factor with regard to the future of the world economy.

Crude oil may have bottomed. However, if the very important long-term $40-$37 support area later gives way in convincing fashion, the next important area of support is all the way down at $26-$25. Also, the $40-$37 area would likely turn into a significant upside resistance should such a breakdown take place.

We previously stated that crude oil had pulled back from anticipated resistance in the $53-$56 area, and that we would consider going long oil either through the futures market or the corresponding level for the USO oil ETF on a correction in oil to around $47. Oil pulled back to $47.26 before reversing higher, but remains trapped in the large $37 to $56 range until a weekly close at $57 or higher takes place. If oil has yet another short-term correction, it may again find support between $47.50 and $45.

We previously stated that the Japanese Yen had reached the single most important level on its long-term chart against the U.S. Dollar and that the Yen was expected to find significant support around the 99-98 level (meaning 99-98 U.S. Cents per 100 Japanese Yen, the inverse of the usual USDJPY Forex market quote which is given as the number of Yen per U.S. Dollar).

Additionally, the long-term 300 day (65 week) moving average that often acts as significant support in uptrends is rising through the 99-98 area, and the Slow Stochastic oscillator at the bottom of the chart has moved into oversold territory, suggesting that - at the very least - a significant bounce is likely to begin within the next several weeks. It appears the Yen may now have started to reverse upward after reaching our expected buying range.

We have a stop loss order at 95.5, and the objective is a test of the recent high near 115, and we would recommend closing at least part of the position at 113 for a potential 14-15 percent profit. For those trading through the U.S. equity market, there is a Japanese Yen ETF with ticker symbol FXY.

Until next weekend, have a very good week. Always remember that proper risk management is essential - and even more so during volatile markets.


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