As you can see from the data above, the spot future Gold contract traded above $US 470 intraday this week, before subsiding a bit as the week wore down and the strength of Hurricane Rita was downgraded from Force 5 to Force 3.
But the "damage" - for those who are trying so hard to "manage" the Gold price - has already been done. At its high spot future close this week of $US 469.40 set on September 21, Gold is now a full $US 13.40 above its previous December 2004 bull market high of $US 456. There are two remaining caveats. First, we have not quite reached the $US 470 level on a spot future CLOSE. That is the level necessary to raise the strategic $US 5 x 3 point and figure chart three clear "X"s above its previous high. Until we get that $US 470 plus on a spot future CLOSE, the path is not clear for a run at the $US 500 level.
The second caveat pertains to the relationship between Gold and paper currencies, specifically the relationship between Gold and the RESERVE paper currency, the US Dollar.
For Privateer and GTW (Gold This Week) subscribers, we run a daily check on this relationship with our $US Gold/$US Index ratio charts updated daily at GTW (Gold This Week). Right now, these charts are in a VERY interesting position, so we have decided to expand the coverage by including some point and figure charts on the ratio. Please read on.
This is a 2 point x 3 point and figure chart - compressed to manageable size - of the ratio between the spot future closes of the $US index and $US Gold. As on the other $US Gold/$US Index charts, the ratio is derived from dividing the $US index into the $US Gold price and multiplying the result by 100.
The performance of the ratio in the period during which the $US Index was stable or FALLING is outlined in grey. The performance in the period during which the $US Index was stable or RISING is outlined in yellow. The dividing line came on December 3, 2004, when the $US Index dipped below the 81.00 level and Gold closed at $US 456.
As you know, the spot future Gold price has now comfortably exceeded its level of December 3, 2004. But the $US index is still well ABOVE the level it set back then. Hence, the $US Gold - $US Index ratio is still below its levels of late last year.
Here are the extremes of the ratio since the $US Index topped out in July 2001 - and the ratio as of September 23, 2005.
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Now, here's a close up of the $US Gold - $US Index ratio since December 3, 2004. The VERY important feature on this chart - expanded from the chart above - is the dotted red trendline connecting the ratio highs of December 2004 and March 2005.
Between September 19 and September 21, the ratio climbed from 522.83 to 534.08. This was the climb which pushed the chart ABOVE that trendline and threatened to break the sequence of lower highs for the ratio which had been firmly in place since the chart peaked last December. As you can see, the chart has now corrected back to levels just below the trendline because of a lower $US Gold price - and a HIGHER $US index - since September 21. That's "normal", right?
Take another look at the chart. You can see that there have been two major rallies since December 2004. The first took place in February/March 2005. The second began in mid July and is still going. During the February/March rally, the $US Gold price rose 8.3% while the $US Index fell 4.4%. In percentage terms, the $US Gold price rose a little less than twice as much as the $US Index fell. So far in the current (mid July to date) rally, the $US Gold price is up 10.4% - BUT THE $US INDEX IS DOWN ONLY 0.8%! In percentage terms, the $US Gold price rose THIRTEEN times as much as the $US Index fell.
The BIG DIFFERENCE between this $US Gold rally and the one earlier this year is that this time, the $US Gold price has gone up but the $US itself has NOT (yet) gone down. In fact, this is the difference which differentiates the current rally from ALL those which have gone before it thus far in the $US Gold bull market. The $US Gold price has gone up - the $US Index has NOT gone down.
This means that to a much greater extent than in any other rally during the $US Gold bull market to date, Gold is rising faster (in many cases much faster) against other major world currencies than it is against the RESERVE currency, the US Dollar. With the substantial rise against the $US too, Gold is definitely STRONGLY signalling the beginning of the second and MAJOR state of its bull market - the stage where it begins to rise against ALL paper currencies. This is what knowledgeable Gold followers have been waiting for ever since Gold "double bottomed" in the mid $US 250s way back in 2001.
If you want a VERY good signal for the end of the current $US Index rally, watch for the $US Gold - $US Index ratio chart to break out above the 2005 trendline which still confines it. The line has now been breached once. If (when) it is breached again - the signal will be in. After that, of course, the chart must get above its 563.10 peak of December 2004.
At the September 23 spot future close on the $US Index of 88.98, it would take a spot future Gold close of $US 501.10 to produce a $US Gold - $US Index ratio of 563.10 - equal to the December 2004 high. Of course, if the $US Index goes higher, the $US Gold price will have to go higher too and if the $US Index goes lower, the $US Gold price will not have to be as high to produce the same result.
We must repeat, the major differentiating feature of the current $US Gold rally is that Gold is rallying DESPITE a flat $US Index, not BECAUSE OF a falling $US Index. Watch first for the downtrend line connecting the two previous highs on the $US Gold - $US Index chart to be taken out on the upside. Watch then for the approach of the ratio to its December 2004 highs. If it takes a $US Gold price at or about the $US 500 level to equal the December highs on the $US Gold - $US Index ratio, that will reinforce the MAJOR resistance point which $US 500 Gold is building up to be.
But whatever the $US Gold price level required to surpass the old December 2004 highs on the $US Gold - $US Index ratio - when it happens - it will be THE signal of the next extended stage of the Gold bull market. Please note - not the $US Gold bull market - but the GOLD BULL MARKET PERIOD. The period during which Gold rises against ALL world paper currencies.
