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A Ratio Worth Respecting

Tim Knight from Slope of Hope's picture




 

From the Slope of Hope: Two months ago, I did a piece called A Fascinating Ratio, which suggested that a major reversal was coming once the ratio reached about 2.0. At the time I did the post in mid-May, the ratio was a little under 1.8, but thanks to the unflagging strength of equities, as well as the unwavering suckiness of precious metals, this ratio is up to 1.95. We're getting very, very close to what I think will be a major pivot point, and perhaps the pairs trade opportunity of the decade:

0717-SPYGLD 
What's interesting is that the last major inflection point wasn't precisely before the financial crisis took hold, as you might suspect. It was precisely a decade ago, in mid-2005. Back then, gold was dirt cheap, and as we know now, equities still had more than two years to go flying higher.

Looking at the individual components, it's obvious that gold has been a piece of trash for almost four solid years now, but we might be reaching an important support point, which is at about 107.50 defined by GLD, shown below:

0717-GLD 

At the same time, the S&P 500 ETF, symbol SPY, has already fractured its long-term ascending trendline. This violation, which took place on June 29, is something I don't take lightly. In my experience, once a financial instrument starts "chipping away" at a trendline, its days are numbered.

0717-SPY

In sum, the closer we get to a 2:1 relationship between SPY and GLD, the more powerful an opportunity is made available to go short the S&P and go long gold. Believe me, I realize what garbage gold looks like right now, and how powerful equities (think NFLX, GOOGL, AMZN, EBAY, etc.) appear to be. In spite of this, this contrarian play could be one of the most potent and profitable strategies in years.

 

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Sun, 07/19/2015 - 08:03 | 6329107 Galieo
Galieo's picture

Why are all those guys trying so hard to sell gold and silver on TV?  They don't want it?  Are they selling high?  Did they buy too high and need to dump it?

Sun, 07/19/2015 - 13:35 | 6329676 slimycorporated...
slimycorporatedickhead's picture

I'm sick of hearing people with comments like this so please allow me to make a point here. If its your job to sell cars, you sell as many cars as you can because its your job. 

Nobody would ever say, why would that car salesman be selling cars to people? shouldn't he want all the cars for himself? I don't understand the false logic. Nobody knows where PM's are heading but any asset is worth what someone is willing to pay for it. Just because some guys in London declare it to be X amount every day, doesnt mean that is the true value of it, we need a free market with true price discovery AKA a run on PHYSICAL to determine the true value.

-Slimy

Sun, 07/19/2015 - 20:23 | 6330695 Boxed Merlot
Boxed Merlot's picture

we need a free market with true price discovery...

 

 

If gold is such a stupid, irrelevent "commodity" why did Nixon close the window?

Sun, 07/19/2015 - 09:52 | 6329247 CPL
CPL's picture

Because they need suckers to hold the bag for the next event of PM's going to zero and the complete destruction of all fiat currencies.  Why?  What did you think was happening?

Sun, 07/19/2015 - 12:16 | 6329475 worbsid
worbsid's picture

Another idea is they are working on a high commission so it doesn't matter what the price is, high or low they make X% of sales and right now the total sales is high and they would like it to go higher. 

Sun, 07/19/2015 - 08:03 | 6329106 Galieo
Galieo's picture

Why are all those guys trying so hard to sell gold and silver on TV?  They don't want it?  Are they selling high?  Did they buy too high and need to dump it?

Sun, 07/19/2015 - 10:56 | 6329089 To Hell In A Ha...
To Hell In A Handbasket's picture

Max Keiser pointed out the Shenanigans of J.P Morgan and the London Whale, with blatant market manipulation of Silver and Gold. Bank insiders reported to the wrongdoing to the SEC and the UK equivalent the FSA and nothing happened. These captured regulatory bodies just swept it under the carpet. The financial sector with its overt fraud and market manipulation, is going unpunished due to the cowardice shown by our limp wristed, treasonous cocksuckers we call our politicians. Are criminals in charge? No! It goes way, way, beyond that. It is now a fucking CRIME SYNDICATE!

Sun, 07/19/2015 - 07:09 | 6329048 El Hosel
El Hosel's picture

Mining is public enemy number one, until its not.... see Coal

Sun, 07/19/2015 - 02:39 | 6328818 luna_man
luna_man's picture

 

 

Don't fool yourself Tim, these markets will be following "new horizons" to Pluto... and Gold?

 

are CRIMINALS, in charge

Sun, 07/19/2015 - 01:54 | 6328794 aka_ces
aka_ces's picture

yes, but at what point will GLD be revealed as another fiat, i.e. not actually holding the physical ? 

Sat, 07/18/2015 - 20:58 | 6328270 class of 68
class of 68's picture

Fred Hickey.. High Tech Strategist.. newsletter, frequent contributor Barron's etc. has come out this month

very bullish HUI/ gold . inflection point. His overall record has been very good.

Sat, 07/18/2015 - 15:28 | 6327491 Grouchy Marx
Grouchy Marx's picture

You said at the last inflection point, the markets shifted two years later. So, does that mean I need not act on this trade for, say, 1.8 years?

 

 

Sat, 07/18/2015 - 20:16 | 6328166 Wild Theories
Wild Theories's picture

check back your history chart, gold started climbing in late 2005

https://www.tradingview.com/chart/?symbol=XAUUSD

Sat, 07/18/2015 - 15:34 | 6327467 Albertarocks
Albertarocks's picture

"The best way to take somebody's property is to convince them they don't want it."

This is exactly what the thieves at JP Morgan are trying to accomplish by driving down the prices of metals.  But it ain't working Dimon, you fucking asshole.

Tim Knight's analysis here is bang on the money.  I have kept this ratio in my own library at StockCharts.com for the past 8 years.  But I will respectfully improve on Tim's suggested trade by just pointing out that the Gold:Silver ratio is also near an all-time ridiculous level, insofar as that the ratio is currently 76.5 to 1.  Throughout history (the past 5000 yrs.), that ratio has averaged about 14:1.  Silver ALWAYS outperforms gold when both are rising.  Both are about to rise.

In other words, right now silver is so incredibly cheap compared to gold that it should be considered damned near as cheap as dirt.  By all means, go get those great gains that Mr. Knight 'correctly' suggests will happen.  But just make them 5 times bigger with silver.

Sat, 07/18/2015 - 20:08 | 6328145 xxxxx
xxxxx's picture

I agree regarding Silver if you check the Silver Gold ratio rather than gold silver ratio you find this extreme has happened only two times in the past 15 years!

Spring 2002 which basicly kicked off the Silver bull market.

Fall 2009 which kicked off the parabolic rise into 2011.

Sat, 07/18/2015 - 17:00 | 6327734 lakecity55
lakecity55's picture

Hey! All you need to know is the Chosenites change their names to: Goldman, Goldstein, Silverman, Silverstein, Dimond, etc.

Now, why would they choose those names?

Because they know what's really valuable.

I never met a Stockstein or a Bondstein or a Fiatstein, have you?

 

Sun, 07/19/2015 - 06:41 | 6329007 To Hell In A Ha...
To Hell In A Handbasket's picture

"I never met a Stockstein or a Bondstein or a Fiatstein, have you?" lol

 

Quote of the week! +100000000

Sat, 07/18/2015 - 17:23 | 6327800 lordkoos
lordkoos's picture

History lesson: Those names date from centuries ago, when Jews were barred from joining various guilds, so many became gold and jewelry traders as there were no guilds for those professions. There were no stocks in those days.

Sat, 07/18/2015 - 19:13 | 6328022 lakecity55
lakecity55's picture

OK, I knew that, it was an attempt at a joke.

Sat, 07/18/2015 - 13:56 | 6327280 shovelhead
shovelhead's picture

I think the new metric for gauging market moves is reading the length and breadth of Caitlin Jenner's new hoo-hah mudflaps.

Sat, 07/18/2015 - 12:59 | 6327147 ebworthen
ebworthen's picture

Get rid of paper gold and this would be 100X more interesting.

Sat, 07/18/2015 - 23:54 | 6328651 Albertarocks
Albertarocks's picture

As I'm sure you already know, the 'paper gold' has been the very tool that the criminals have used to drive the price of the physical lower.  So you're going to get your wish because when the spot price of gold does kick off a genuine uptrend, the paper traders are going to get slaughtered... in accordance with the laws of nature. 

I wouldn't be surprised to see some of these instruments actually get destroyed right along with... hopefully... the bankers themselves.  Because once gold starts soaring, it will be soaring because of some sort of calamity going on... market crash... defaults somewhere... chaos everywhere.  And at least 'some of' the banking cartel in deep, deep shit... in accordance with the laws of nature.

Sat, 07/18/2015 - 12:40 | 6327116 honestann
honestann's picture

In this kind of activity, timing is everything.  Nonetheless, for other reasons (not charts or technical), this kind of trade looks good come +/- early September.

Sat, 07/18/2015 - 12:00 | 6327046 monad
monad's picture

Where's the price fixing factors? At least the daily gold "correction"?

Sat, 07/18/2015 - 11:37 | 6326994 andrewp111
andrewp111's picture

Only one component needs to move to move the ratio, and you can't necessarily predict the direction of either component. If the SPY crashes and GLD crashes less fast, the ratio could still drop a lot. Or if the SPY stays about the same and GLD drops, the ratio could go up a lot.

Sat, 07/18/2015 - 10:23 | 6326842 Comte d'herblay
Comte d'herblay's picture

"PERHAPS"

Perhaps not.

But I admire such precisely pleasant charts of the past to ogle. Like looking at Sofia Vergara's cleavage in teeny bikini. All I know for sure is I will never be able to do more than look. From Afar.  And that does no good at all. 

Sat, 07/18/2015 - 01:32 | 6326387 Aquarius
Aquarius's picture

Yes, compelling and due - there is no random; all is spontaneous. And besides 2 is an eccellent and ancient pythagorean numbers of Principle; the foundation of life itself while also representing scientifically, 'critical mass'.

I see Q4 2015 as the emergence of the 'death knell' of the USA as a force of integrity; it is eating itself; it is in denial; it knows nothing truthfully, which in itself is a deathly state. Its affairs are micro-managed by others and crime appears to be its solution to all its ills.

Whatever, the whole scenario is highly interesting. 

Gold itself never varies in its value - everything varies around it - It is the only Universal Standard that we have - a wonderful barometer - whereas paper, called GLD, is merely as a deck of cards with which to idle the time away; paper.

Fiat paper depends on the confidence in the  issuing Government. Who today would have any confidence in the US Government - the idea is totally ludicrous.

Gold is integrity.

Gold is Certainty.

Ho hum

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