In past commentaries, I’ve written about my favorite form of technical analysis. That is intermarket analysis. Intermarket analysis takes traditional technical analysis much further. Normally, we’d look at a market by itself. We’d look at its price action, potential patterns and its momentum. Intermarket analysis takes this a step further by comparing the market at hand to various other markets. It gives us an idea of what is really going on and where market leadership is.
In regards to Gold, intermarket analysis is even more important. Gold is the type of market or asset that thrives when other asset classes are not performing well. Rarely does Gold perform well if there is persistent strength in another asset class such as Stocks or Bonds. We are in a Gold bull market, so Gold will outperform other asset classes over time. However, it is an important exercise in trying to gauge the near-term outlook for the yellow metal.
Below we graph Gold against the various asset classes: Commodities, Bonds and Stocks. We also graph Gold against currencies, as it is the currency of last resort.
We can see that Gold has already broken out against both Corporate and Treasury Bonds. The breakout against Corporates is very significant as it comes after a 2-year base. Meanwhile, Gold has just broken out against Currencies (ex- US Dollar) and a breakout against Stocks appears imminent. Commodities are the only group holding up against Gold.
The conclusion, in the near future money will move out of Treasuries, Corporates, Currencies and Stocks and go into Gold and likely Commodities. The last time Gold looked this strong in relative terms was in Q3 2009 when Gold began a move to $1220/oz. With this type of relative strength, it is very likely that Gold makes another big move into 2011.
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Jordan Roy-Byrne, CMT