Friday, December 20, 2013

Dow Theory Update for December 20: XAU/GOLD ratio at 30 years low: Are Gold miners a “buy” now?

Stocks make higher highs confirmed

Yesterday GDX made lower lows. Coincidentally, the XAU index versus gold has reached a 30 years low. Accordingly, gold miners are the cheapest for the last 30 years in terms of gold. Is this a buying opportunity? If we bet for a reversion to the mean, I’d answer “yes”. However, I adscribe more credence to trend following than to mean reversion. So, why fight the trend? As I explained here and here, the primary trend is down and there is headwind, since gold itself, remains stuck in a primary very cheap against gold.

Furthermore, even if the ratio strengthens in favor of the miners in the future, this is no guarantee for the miners to show positive results. It could well be that they decline “less” than gold in the future. Thus, even though the ratio could mean revert, we could end up losing money.

Finally, ex post facto (after the fact) it is suggestive to look at such ratios and say “look everytime the ratio went that low, the miners staged a bull market”; however, I find such evidence anecdotical and curve fitted. What has worked a couple of times in the last 30 years should not necessarily work now. In other words, we really don’t know if the ratio will continue heading south. Why fight the trend?

We will know soon if the miners become a good buy. Why? Because their primary trend would turn bullish. And as you know the Dow Theory gets you aboard soon enough to ride the bull.

So, in the meantime, I don’t fall prey to the siren’s songs, and maintain my veredict: For the time being gold stocks are not a buy, in spite of their being cheap by all measures.

US stocks

The Industrials, Transports and SPY closed up; all of them bettered the last recorded closing highs, which means that the primary bull market remains in good health.

The primary trend is bullish, as explained here, and more in-depth here.

The primary trend was reconfirmed as bullish on October 17th and November 13th, for the reasons given here and here.

Volume surged today and was much higher than yesterday’s, which is bullish as higher prices were joined by expanding volume. Given the bullish volume pivot we saw two days ago (more about it here) and recent volume readings, I label volume as bullish.

Gold and Silver

SLV and GLD closed up. In spite of today’s up close, GLD remains below the primary bear market lows of June 27th. However, SLV remains above such lows, and thus, for the time being, the primary bear market has not been re-confirmed once again yet. For the reasons I explained here, and more recently here, I feel the primary trend remains bearish. Here I analyzed the primary bear market signal given on December 20, 2012. The primary trend was reconfirmed bearish, as explained here. The secondary trend is bullish (secondary reaction against the primary bearish trend), as explained here.

As to the gold and silver miners ETFs, SIL closed unchanged, and GDX closed up. The primary trend is bearish, as was profusely explained here and here. Likewise, the secondary trend is bearish.

Here you have the figures for the SPY which represents the only market with a suggested open long position:


Data for December 20, 2013


Bull market started
06/24/2013 157.06
Bull market signaled
07/18/2013 168.87
Last close
12/20/2013 181.56
Current stop level: Secondary reaction low


Unrlzd gain % Tot advance since start bull mkt Max Pot Loss %

7.51% 15.60% 2.05%

The Dow Theorist

No comments:

Post a Comment