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Shahla
Money Managing Guru
Joined: 13 Nov 2004
Posts: 3324
Cash Points ££ 126163.28
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 Posted: Wed Feb 28, 2007 1:11 pm Post subject: Analysis of Gold and the XAU Index Ratio Charts |
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It has been a while since I have talked about ratio analysis and because of a few developments of late, I thought that this may be a good time to do so. First, let me begin by explaining to those that may not understand, a ratio chart is calculated by simply dividing one stock or commodity by another.
This in effect then shows us the "Relative Strength" of the two. We can then take this analysis one step further by comparing the ratio chart to the underlying stock or commodity and even applying indicators to the equation. Let's take a look at a few examples.
To begin with, below I have a monthly XAU/Gold ratio chart along with my Trend Indicator. When price is moving up on this chart it is telling us that gold stocks are out performing physical gold. When price is moving down, the opposite is, of course, true. As an example of this, let's look at the period between the May 1996 top and the August 1998 top. During this timeframe gold fell from roughly 410 to 271 or 35%. All the while, the XAU fell from 150 to 51 or 66%. So, as this chart suggested, the XAU was the weaker of the two. If we take the bullish period between October 2000 and May 2002, gold advanced from 266 to 331 or some 24%. But, during that same period, the XAU advanced from 41 to 84, which was up some 105%. As this chart suggested during that timeframe, the XAU was the strongest.
The next question comes with knowing when a turn has actually occurred. The best answer for this comes with my Trend Indicator, which is plotted in green and red. When the green line is above the red line, we know that price is in a confirmed up trend and in that environment the gold stocks will be stronger than gold. The flip side of this equation is of course that when the red line is above the green line gold will be stronger than the stocks. So, we know based on this long-term monthly chart that we are now in an environment in which gold is stronger than the gold stocks. Since January 2006, when this chart peaked, gold is up some 19% while the XAU is actually down over 5%.
Now let's zoom in a little and look at this same chart on an intermediate-term basis. Here too we find that we have been in a downtrend throughout most of 2006 with a couple of brief and failing breaks to the upside. When looking at this level we see that since January we have been in an environment in which the intermediate-term has also been moving lower. This then is in alignment with the longer-term monthly chart so both levels are moving in the same direction.
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