Gold Valuations Not At Bubble Levels Yet

Posted by Bigtrends on February 7, 2012 11:09 PM

Following up on yesterday's article about bubbles, is Gold a burst bubble, a forming bubble, or neither (yet)?

With that in mind, let's have a look at the Gold (GLD) price.  The next chart shows Gold in the 1970's.  At the peak, price was trading 118.32% above the 50WEMA, and 170.04% above the 100WEMA.  WOW!

Gold 1970s Chart

Currently, Gold is only trading 7.54% above the 50WEMA and 17.71% above the 100WEMA -- so compared to 1980; Gold is NOWHERE near a Bubble.

Gold Current Chart

The same counts for Mining stocks, as measured by the HUI Index (GDX), as it is trading roughly at the 50WEMA and only 5% above the 100WEMA:

HUI Weekly Chart

When we look at the Gold-to-Dow Jones Industrial Average (DJIA) (DIA) ratio, we can spot a nice uptrend, but nowhere near going vertical. 

However, when we look at the last 12 years, we can see that when price was 30%+ above the 200WEMA or 15%+ above the 50WEMA, it was time to be cautious.

On the other hand, when the ratio was 10% below the 50WEMA and 200WEMA, this offered some nice buying opportunities:

Gold/DJIA Ratio Chart

When we look at the following chart, we can see that, as long as the (reversed) Dow Jones-to-Gold ratio was above the purple line (100WEMA), stocks were in a Bull market, while in 2001, they entered a bear market when measured in "real currency" ... and will continue to be in a "real" bear market as long as the purple line is not broken to the upside on a sustainable basis:

DJIA/Gold Ratio

I like to make comparisons of assets as I think history often rhymes, so here's another one which I have shown more than once.

It's Gold in 2006 vs. Gold Now, In an overlay study:

Chart 15

If 2006 is any guide, Gold could consolidate throughout the summer, before taking off sharply into 2013.  Of course, that is, as long as the comparison holds. 

Good luck investing.

Courtesy of Willem Weytjens, www.profitimes.com

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