Thursday, September 18, 2008

More on the market

September 18, 2008 -- When the ratio rises, gold is out-performing the gold miner shares. The disconnect between gold and gold mining stocks may be over. Yesterday, for a change, the shares actually did better percentage-wise than the metal, which is why you see the ratio dropping at the end of the chart line. My only objection to owning the leveraged gold mining shares over bullion is that the gold shares are stocks, and in a rotten general market those who own the gold shares are tempted to throw their gold shares in with the rest of the falling common stocks. Which is what has been happening since last July. Of course, the purest play is actually owning the metal via gold coins in your possession. The gold mining shares are valued on many factors other than the price of gold. Of course, you can ascribe all of above to my own bias in favor of bullion.

Lowry's ominously reports that since this decline began, there have been a total of nineteen 90% down-days, the most of any period in the 75 year history of the Lowry's studies. I see this as massive distribution of stocks, and the implications of this are not pretty. Why have large sophisticated interests been so anxious to unload stocks, many times on rallies? We'll know the answer to this question in the fullness of time. I can't come up with the exact reason, but the action is hardly comforting.

The national debt of the US is now compounding negatively. No currency can hold up in the face of our over-spending and rapidly compounding national debt. Speaking of money, the Fed over a two day period injected over $120 billion into the US banking system. Just this morning it was announced that the Fed would quadruple the amount of dollars central banks around the world can auction to close to $250 billion "to address the continued elevated pressures in US dollar short-term funding markets." Central banks around the globe are flooding their banking systems with much-needed liquidity, and of course, gold is taking note of this trend as the net total of fiat currencies around the world surges.

This is global inflation.

In the end, gold conquers all. Back in July 1999, the Dow would buy 44 ounces of gold. Things change -- as of yesterday (see chart below) the Dow would only buy 12.62 ounces of gold. Since 1999, the Dow has lost 71% of its value in terms of gold. I expect this ratio to decline to 5 or below, before the next few years are over.

Many ignorant gold detractors claim that "gold is just another commodity". Really? The chart below shows the ratio of gold to the CRB Commodity Index. Just another commodity? Then why is gold surging while world commodity prices are falling?

The VIX was down 3.12 to 33.10.

From another standpoint, the "external market" looked deceptively good today with the Dow up 410.03 and Transports up 182. But the "internal market" didn't cut it --with up volume only 57.4% of up + down volume -- we're looking for a 90 percent upside day -- and today was far from that. So we wait for the hoped-for 90% upside day. Today there were 72 new highs and a fat 1041 new lows --33531 stocks were traded on the NYSE so a large 29.4% of all stocks traded today hit new lows, hardly a healthy showing. With crossed fingers, we wait for that elusive 90% up-day.

From: DowTheory


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