Gold to XAU Ratio

Comments: The Gold to XAU ratio is at it again, testing 5.00. Usually values at around 5.00 have resulted in relative buying of the mining shares, but I have a bad feeling about it this time. As I mentioned before, it is possible that the Gold/XAU ratio may have had a "bullish" breakout with a price target of 5.8 to 6.00, which would be very bad for the mining shares--though eventually it would mean a great buying opportunity. All this suggests that GLD and SLV may be better than the miners for now. Let's keep in mind that during the year and a half period of consolidation in 2004 and 2005, the Gold/XAU was well north of 5.00 for 6 weeks. That is quite possible again here because, obviously, we are again currently in a period of major consolidation.

Among the miners, I'm currently looking at CUP (copper not gold, but that's the whole point) and UXG. UXG has been poor but I think that is partly because of the bad experience investors had after their previous merger attempt with their Nevada neighbors collapsed. If they can pull of the merger this time, UXG could potentially enjoy a nice markup, but it is a speculative play. The offer expires March 23, so pretty soon. I also like it because it's correlation to the HUI is relatively low.

My buddy Dean recently sent me an article from the left-leaning NY Times titled "China to Open Fund to Invest Currency Reserves". According to the article, "China will create an agency to invest its immense reserves of foreign currency, now totaling more than $1 trillion, the country’s finance minister announced on Friday."

"They’re not going to be looking for financial assets, but energy assets and natural resources, minerals, things China desperately needs,” said Jing Ulrich, an analyst at JPMorgan.

Although no mention is made of Gold, the mere act of diversifying away from US Dollar-denominated reserves could potentially have positive spill-over effects on Gold.