An important break of support very quietly occurred over the past few days that could have major implications going forward. A few more days of confirmation will finalize this noteworthy event.

Regards - VHF

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DOW/Gold Ratio Update

Nico Pantelis

June 9, 2011

About a month ago, I reviewed stock performance versus gold by analyzing the Dow/Gold ratio. I concluded:

“Gold rising further from current levels is possible, but history clearly shows the yellow metal suffers summer doldrums, which in the current stage of the secular bull market usually means sideward price action for the coming months.

“A sharp decline for stocks seems more obvious, as investors await more stimulus from the Fed, but probably won’t get their new dose of QE immediately, which could lead to a sharp correction.

“Furthermore, stock valuations are ballooned, pimped by unusual high profits and extreme margins. With the steep rise of input costs, due to explosive commodity prices over the recent months, investors could get very disappointed if their high expectations aren’t met.

"These are just a few risks which could trigger a stock market selloff…”

Today, we are in the midst of an accelerating stock market decline, with the most important indices dropping below their technical support lines. The S&P 500 has sunk below its crucial 1,300-level, while the Dow Jones has been falling towards 12,000 points.

On the other side of the Dow/Gold equation, gold is going strong, and is still trading around $1,550 per ounce.

This mix – collapsing stocks and strength in gold – translates into a falling Dow/Gold ratio. The ratio currently stands at 7.9x in Dow/Gold chart shown below.

I am looking for a Death Cross formation, which would trigger the next leg down for the ratio. Meanwhile, we have entered the crash-territory and are now on our way towards the 7x-level for the Dow/Gold.

I still expect the ratio to drop even further this time, towards 6x or perhaps even lower. The forcefulness of gold is quite astonishing, trading near its all-time high during these shaky market circumstances. To us, this is a sign of further strength for the yellow metal in the near future, which indicates even higher gold prices than we had anticipated.

I reiterate my advice to avoid or minimize exposure to the general stock markets for the rest of 2011. Use the summer doldrums in gold and gold-related assets (like mining stocks), to load up the truck. As far as gold is concerned, it looks like it’s going to be a hot autumn… again!