The $XAU chart above dates back to 1985. At the bottom of the chart is the Price Relative to gold Ratio (PRTG). PRTG ratio measures the premium or discount the $XAU is selling against gold. This ratio identifies when gold stocks are cheap or expensive compared to the yellow metal gold. When PRTG ratio is near .20 or below then gold stocks are out of favor and cheap and at a good buy. When PRTG is near .30 range or higher then gold stocks are in favor and expensive and near a high. The time to buy gold stocks is the transition from cheap heading to expensive. To identify this buying zone, we have drawn a red trend lines connecting the highs on PRTG and where PRTG has exceeded those downtrend lines and have triggered buy signals. These buy signal on the monthly PRTG ratio where triggered in early 1993, late 2001, early 2003 mid 2005 and in the last couple of months a bullish crossover has occurred and has triggered a buy signal and the buy signal is still on going. Even though a “Shakeout” did occur in August of this year the month PRTG buy signal remained intact. Therefore the bigger trend is up.
Above is the Breadth statistics for the HUI as of the close yesterday. We keep tabs on this study because its giving good insight of what is going on the HUI index. The bottom window is the % of stocks above its 50 day moving average. When this percentage is near 0% the market is near a low and when near 100% the market is near a high. The next window up is the % of stocks above its 10 day moving average. Again the same percentages work the same way. When both the 10 DMA and 50 DMA are both at extremes (either near 100% or 0%) the market is near a turn and head in the opposite direction. We have circle in blue where the 10 DMA and 50 DMA where near 100% and helped to pick out the highs in the HUI. Recently both the 10 DMA and 50 DMA turned down near the 100% range and suggest the market was near a short term high. The HUI tested the previous high of 9/21 and the McClellan Oscillator was far below its previous high and a negative divergence similar to the negative divergence at the previous highs on the HUI. The negative divergence on the McClellan Oscillator helps to confirm the 10 DMA and 50 DMA for a short term top. We have support coming in near 160 on the XAU and the next support below that is the 147 range. We will be watching these areas for a bullish setup on the XAU. Also on the last COT (Commitment of Traders) report, the Commercials have back off its bullish stance and now are short term bearish. Also Seasonality for Gold in the month of October is bearish.
Therefore they may be a pull back this month but the pull back should be bought. We have support coming in near 160 on the XAU and the next support below that is the 147 range. We plan to go long the XAU on the next buy signal.
Editor's Note: watch for Tim Ord's upcoming book, "The Secret Science of Price and Volume", to be published by John Wiley & Sons, in February 2008.