As the CRB Index decisively broke out to a new recovery high while breaking through both a horizontal resistance level and a falling downtrend that began in 2008, a divergence is appearing between crude oil and gold. The oil to gold ratio has strengthened to test a falling trend line.
This test of trend line resistance could present some opportunities for traders.
Has The Economist done it again? Is the latest cover a contrarian signal of a pending top for energy stocks?
It’s starting to look that way. As energy stocks test a key absolute resistance zone, they are struggling to overcome relative resistance. At the same time, relative breadth is deteriorating (bottom two panels).
By contrast, the technical outlook for gold and gold miners appears far more constructive. Gold prices have traced out a double bottom after testing a support zone. Moreover, TIPs prices are rising again, indicating falling real rates, which is supportive of rising gold prices.
The washed-out nature of this group is more evident in the gold miners (GDX). GDX rallied through trend line resistance, which is positive. The percentage of bullish stocks fell to an oversold level and they have begun to recycle. In addition, the GDX to gold ratio and the small-cap GDXJ to GDX ratio have both risen through falling trend lines. These are all signals of underlying strength.
In conclusion, energy stocks may be nearing a climax top while gold and gold stocks are showing bullish signals after several months of dismal performance. Traders should avoid energy exposure and buy gold and gold stocks for better potential performance.
However, make no mistake, any gold rally should be treated as a tactical bull rather than a secular bull. The gold to CRB and cyclically sensitive copper to gold ratios are signaling a reflationary regime. Long-term investors should therefore seek exposure to cyclically sensitive base metal and other commodities over the shiny yellow metal for better returns.