Is Gold Basing For The Next Leg Higher?

“If you love somebody, let them go, for if they return, they were always yours. And if they don’t, they never were.” – Khalil Gibran

It has been a volatile period for Gold (GLD) prices since the Summer Crash of 2011 erupted. For a moment in August, there was tremendous strength in the precious metal which far outperformed stocks as investors feared a repeat of 2008. In September, Gold prices utterly collapsed while Europe continued to drag on risk-sentiment, and Treasuries in the U.S. performed well. And while Gold has underperformed the broader stock market since then, there does appear to be a basing pattern underway.

Take a look below at the price ratio of the SPDR Gold Trust ETF (GLD) relative to the Dow Jones Industrial Average (DIA). As a reminder, a rising price ratio means the numerator/GLD is outperforming (up more/down less) the denominator/DIA.

I’ve drawn in a horizontal support in the chart to show that the relationship of Gold to the Dow seems to be stabilizing after having peaked in late August. There has been a lot of chatter about the idea that Gold likely does not perform well if QE3 is off the table, since a reduction of aggressive monetary policy by the Fed lessens the appeal of Gold. While this may be true, it may also now be priced in.

Furthermore, there may be a realization that even though there is likely no QE happening in the U.S., the bias for emerging economies is still to lower rates further. This additional stimulus coming from emerging markets could increase demand for Gold on continued reflation. While the trend may not have turned up just yet, a good amount of weakness may now be behind Gold relative to stocks.

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