Is gold ready for the breakout?

There are a number of interrelated quantities that I have been tracking. The gold price has been coming back from the low of 1,550 or so. The first question is; have we resumed the gold bull market rally, or are we seeing a reaction rally? The top graph shows the gold prices for the last two years. We see a confirmation of the breakout from the correction then we see a retrenchment and what appears to be a resumption today of the breakout. A confirmation of that will occur when gold closes above 1,770.

An important indicator of what people expect to happen to gold prices is what they expect to happen to the gold miners. The second graph down shows the XAU, the gold + silver miner index. We have two descending lines. The yellow color is the last and steeper drop in the index and the green color is a longer term descent. XAU has broken out of the steeper descent, but is yet to break out of the longer descent.

Another important determinant is the gold to oil ratio. Today this ratio is 16.5. Oil has closed above $105/bbl and is forecast to rise to $115. If it does close above $115, then it has little resistance to 140. The gold to oil ratio is important, because one drives the other. For example, gold going up had driven up oil prices. Now, it is oil prices that are pushing gold prices. At a gold to oil ratio of 16.5, a barrel of oil price of $150 would push gold price to 2,475. If the ratio goes to 27.5 and crude goes to $150, this would put gold at 4,125.

A second determinant is the ongoing debt crisis in Europe. The eyes are on Greece. This is a country that has been in a recession for 4 years. The results are scary. Unemployment among young Greeks is 50% and 25% of companies have gone bankrupt in the last 4 years. Greece's economy contracted 14% and is set to contract another 7%. The bailout of Greece is really a bailout of European banks.

Oil prices feed back on economic growth. A 10% rise in oil price is calculated to produce a half percent drop in our GDP. Iran is cutting oil to Europe and Saudi Arabia is cutting production to increase prices. Need I say it? Yes indeed! This will not end well!