Gold Finally Wakes Up
to the Inflation Alarm

Key Points

Chart in Focus:

While inflation has been the talk of the town for the past few months, Gold had largely stayed out of the conversation until now. The yellow metal has broken the declining trend line that began with the August 2020 peak after taking out the 200-day moving average. This opens the door to a move to the $1,920 level in the near term. Above that mark, we are likely to see an attack of the former highs. Renewed price strength coincides with the 14-day RSI shifting to a bullish regime, which argues for further upside as long as the price is above $1,820.

The following relationships can help give us a sense of the level of risk appetite on the part of investors.

High Beta vs Low Volatility

The High Beta to Low Volatility ratio tried to break out of the consolidation that has been in place since March but has pulled back into the range. The ratio is above the rising 50 and 200-day moving averages, keeping the trend in favor of High Beta. The 14-day RSI also remains in an uptrend and in a bullish regime. Our bias continues to be for further upside unless the moving averages are broken.

Discretionary vs Staples

The ratio of Consumer Discretionary stocks relative to Consumer Staples stocks traded to a new high this week, remaining above the 50 and 200-day moving averages. Price-based support lines up with the 50-day moving average, and the 14-day RSI is holding in a bullish regime. We would like to see this indicator break into an overbought condition to add further momentum confirmation to the price trend.

Copper vs Gold

This week, the Copper/Gold Ratio remains under pressure, now trading below the 50 and 200-day moving averages. This solidifies October’s move to new highs as a “false breakout.” Note that the breakout attempt was not confirmed by momentum as the 14-day RSI made a lower high. Now the indicator is moving below 40, which is the lower bound of a bullish regime. If price breaks support at the August lows, the trend will have reversed to the downside. In that scenario, we would have to question the longevity of the reflation trade, and we would also expect to see Growth stocks leading Value stocks.

Lumber vs Gold

The Lumber/Gold ratio has broken below the 50-day moving average and remains well below the 200-day moving average. We are still open to the idea that the current price action is part of a base-building process, but that view would be negated with a break of support. As the price breaks below the 50-day moving average, the 14-day RSI is also breaking lower and moving toward an oversold condition, putting momentum in the bearish camp.

Small vs Large

The ratio of Small Caps vs. Large Caps is trapped between the 50 and 200-day moving averages as it continues to trade in a consolidation. Until there is a resolution to the consolidation, it is hard to have a high conviction view on performance. A break of the 200-day moving average would signal that Small Caps have taken control, but a break of support puts Large Caps in the driver’s seat. Momentum is not providing any clues as the 14-day RSI is in the middle of the range and has not been able to become overbought on the way up or oversold on the way down.

Growth vs Value

The Growth vs. Value theme is checked back to the breakout level and remains above the rising 50 and 200-day moving averages. The 14-day RSI is holding in a bullish regime after becoming overbought on the recent rally in price. Above the 50-day moving average, Growth retains the advantage.

Take-Aways