Gold’s Outperformance Explained | Talking Trades

And that is highly significant because it tells you that whatever is happening with the US dollar index kind of doesn't matter because any strength that it has is being outpaced by gold. Welcome back to another episode of Talking Trade, Ken Wadsworth and myself, Patrick Karim. Today we're going to talk to you about versus. Everybody's pricing everything in fiat. That's fine. But if you want to gather evidence, how strong your asset is, compare it, compare it to anything. But if you're outperforming something else and your own price chart is going up, then you have added evidence that you have something really substantial on your hands. So look, Kevin, time for you to do your magic, do your showcase and impress the crowd. I'll do my best, Pat. Okay. Well, I'm sharing my screen now, and this is to try and shine a light on why we were so bullish on gold over the last, well, quite a long period of time, actually, at least the last year or more, actually, as gold was correcting and pulling back and consolidating. How come we weren't ultra bearish or very bearish on gold? And this series of charts is kind of like gold's hidden indicators. It's what's going on underneath the hood if you're in the US or underneath the bonnet if you're over here in the UK. It's when you start peering into the engine of what's going on in the precious metals, you can really see, almost really sort of seeing into the future. So starting off with this first ratio chart, it's US M2 money supply versus gold. And in gold bull runs, strong gold bull runs, and particularly gold bull eras, which are defined by a capital rotation event away from stock markets towards precious metals, in gold bull runs and gold bull eras, you get a very clear breakdown for M2 money supply versus gold. Now, remember, this is a ratio chart. And when this ratio is moving up, it means that money supply is outperforming gold. And when the chart breaks down, it means that gold is outperforming money supply. So the dollar price of gold is increasing at a faster rate than money supply when this chart is going down. And clearly, in strong bull market trends, that is exactly what happens. Now, look back here. This was January, not 2024. It was January 2023, more than 18 months ago, when I was posting this chart to anybody that would listen all over social media and for website members, of course, to point out exactly what was happening here and that there had been a breakdown. And then a little while later, in the middle to late stage of 2023, not only that, there was a back test on this rising wedge. And then the ratio chart started to break away and move downwards away from that rising wedge. So it told me, as a technical chart analyst, that from this one piece of evidence, that the probabilities were that gold was moving towards a strong period of outperformance. From this one chart, of course, you can't make the conclusion that gold is definitely entering a bull run or a bull era because you need confirmation from a number of charts. Because when you're trying to work out what the picture is on a jigsaw puzzle, you can't tell from one piece or even two pieces or three pieces. You need really lots of pieces of that jigsaw puzzle, bring them together, and then you can actually make out what's going on. So let's take a look at another piece of evidence, which has actually recently, much more recently, just fallen into place. And this is the equal weighted SPX versus gold. You sometimes hear us talking about the SPX versus gold. Well, this is the equal weighted SPX versus gold, as if we were to give all the stocks in the S&P 500 equal weighting. So you're stripping away the fact that some of those companies are multi-billion or multi-trillion dollar companies, and just put them all on an even flat playing field, if you like, and giving them all equal weighting. And when the chart's going up, the equal weighted SPX is outperforming gold. When the chart's moving down, then gold is outperforming the equal weighted S&P. Now, critical, critical part here is identifying the breakdowns, identifying when the chart is breaking down, and then identifying when the chart is reversing and breaking back to the upside. That's the critical piece of information to glean from this chart. Now, very clearly, we've got a curved resistance line, a dome, if you like. I could flip it upside down and invert the chart, and it becomes an arc. OK, that's me turning the chart upside down. So often, you'll see these cup and handle patterns. Well, it's a cup pattern if you turn it upside down. But if you have it the right way up, then, of course, it's a dome. And what's happening here? Zoom right in. We are breaking below the 12-month moving average. We're breaking below the 36-month moving average. We're breaking below the Ichimoku cloud. That's this red and green cloud here, which provides support and resistance on a technical chart. We're breaking below horizontal support and resistance and starting to drop away more rapidly. So that's another piece of evidence telling us that capital rotation event is in force and that gold is looking at a strong period of outperformance. These are all the hidden indicators for gold that many technical analysts might not necessarily be looking at, might not necessarily show you. But here, we've got gold versus the US dollar index. That's a bit of a head scratcher for you, isn't it? How's gold versus DXY telling you something valuable? Because this isn't gold in US dollars. This is gold in DXY. So what is DXY? Well, DXY, the US dollar index, is an index that tells you what is the relative strength of the US dollar versus a basket of other currencies, and primarily the euro, which makes up the bulk of the US dollar index. So the US dollar index is measuring how the US dollar is performing versus other currencies. And what this chart tells you is how gold is performing against the US dollar's relative performance. Just pause and think about that for a moment. This is telling how gold is performing against US dollar strength. So if the US dollar strength is being beaten by gold, then that is highly significant because it tells you that whatever is happening with the US dollar index kind of doesn't matter because any strength that it has is being outpaced by gold. OK, so you'll often hear people saying, well, gold can't go up when the US dollar is going up or the US dollar index is going up. Complete and utter garbage. Yes, when the US dollar index drops, it gives gold a shove in the back and helps it on its way. But gold can very well rise even when the US dollar is gaining strength versus other currencies and the DXY is rising. Look at the last time this broke out, 2003. What happened next? Gold went up by huge, huge percentages. It doubled, and then it doubled again. It went from $250 down here up to $1,900 up here. So it doubled, and it doubled again, and then it doubled again. Well, we're only just breaking out now. So just think what might possibly happen as that ratio chart continues to move upwards. So looking at these ratio charts and looking at how these relative performances stack up is critical to understanding what is happening with gold. One last one I wanted to show you is gold versus CPI. I'll just type that into the chart for you. So it's XAU USD versus CPI, CPI AU. There we go. So this is gold versus CPI. And what can we see from this chart? Well, very clearly, very clearly, we've just broken out versus CPI. Gold has formed a cup and handle pattern versus CPI, and it's broken out. We've got a confirmed quarterly breakout at the end of September, and that goes all the way back to 1980. It passes through the highs in 2011 back to 1980. So this is another hidden indicator that you put together with all those previous hidden indicators, Pat. And it tells us exactly what is happening with gold. And it tells us, it gives us very strong clues as to where gold is heading over the coming months and years. That's right, Kevin. Whole bunch of evidence. You see it if you're outperforming all those other asset classes. Well, guess what? You have the tailwinds more than headwinds. Guys, thanks for watching. Remember, subscribe to like and reach out to us there. Thanks, guys.