Ratio Flashes Warning Sign for Gold

09/21/2011 6:00 am EST

Focus: COMMODITIES

A long-standing technical relationship is coming into question, pointing to the possibility for a drastic outflow of funds from gold into US Treasuries, an event that would drastically change the markets.

Gold has a technical relationship with many other market segments. Looking at its relationship with US Treasuries, it is now at a critical juncture. Below is a ratio chart of the SPDR Gold Trust (GLD) against the iShares Barclays 20+ Year Treasury Bond Fund (TLT).

Notice how this ratio has been in a range between 1.51 and 1.67 since April; a pretty tight correlation for this period. But now as it approaches the bottom rail of this channel, there are signs that it may crack.

chart
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First, the Relative Strength Index (RSI) has been trending lower, not a sharp move like the last time it bottomed.

Next, the Moving Average Convergence Divergence (MACD) indicator has been negative for most of the move down and is just now becoming more negative again.

The volume on this move lower is much bigger than the last test as well.

Finally, it closed under the 200-day simple moving average (SMA) for the first time since September 30, 2010, just ten days after the S&P 500 broke out of its bottoming pattern to start the move higher.

It may hold the channel and reverse back higher, but a breakdown, indicating a flow from gold into US Treasuries, could cause a powerful change in the markets. Be mindful.

By Greg Harmon of Dragonfly Capital

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