“As an actor, it's great to play a strong leader with a heart of gold.” - John C. McGinley
First, allow me to introduce myself as a new contributor to Investing.com. I'm quite excited to be a part of the growing community of intelligent market commentators. My name is Michael A. Gayed, CFA and I am known for providing a different way of thinking about markets. Everything I do is related to intermarket trend analysis, which is designed to interpret the underlying message of the markets which investors may be sending consciously or subconsciously through price. The primary idea is to put a spotlight on relative trends to see if there is a consistent signal being sent underneath the market's surface.
It is this approach which led me to call for a deflation pulse one year ago when Marc Faber of the Gloom Boom and Doom Report first published one of my writings alongside his Monthly Commentary. It also led me to correctly call for a Summer Crash in June, Fall Melt-Up in late September, and Winter Resolution to the volatility at the end of December.
Having said all that, I want to address the idea that we could be in for a potential change in the relationship of Gold (GLD), which is often perceived as a currency, to the U.S. dollar (UUP). Take a look at the price ratio chart below. As a reminder, a rising price ratio means the numerator/GLD is outperforming (up more/down less) the denominator/UUP.
I've annotated the chart above to show what could be an interesting trend forming in the relationship of Gold to the Dollar. First, note that Gold has significantly outperformed the Dollar since early 2009, staging a significant period of outperformance since then.
Investors position into Gold for a number of reasons, with many buying it as a way of playing a “currency without a government” which is not at risk of dilution through central bank actions. Notice the peak in the ratio of Gold to the Dollar appears to have occurred in late August 2011, as the Summer Crash was expressing itself through increased volatility and concern over in Europe. Gold began underperforming ever since then, albeit with some significant relative volatility.
We may be at a juncture now where the peak in the downtrend resistance line has been hit, and weakness in Gold relative to the Dollar continues. Keep in mind that this is a relative argument. Both Gold and the Dollar can rise, but the issue is more the speed of the advance.
What might cause Gold to underperform an up Dollar? The answer may simply lie in the age-old concept of mean reversion. Given the substantial period of strength Gold has had relative to nearly all asset classes, the pace of further advances may soften simply because the yellow metal has already done so well for so long. Either way, for those watching Gold as a currency, its worth closely watching its relationship to the greenback.
Disclosure: This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.