GOLD XAU RATIO REVISITED

“To put some historical context on this measure, since 1974, the Gold/XAU ratio has been greater than 5.0 about 15% of the time. When the ratio has been this high, the XAU has followed with annualized gains of 89.6%, on average – a figure that remains high even if the data is split into multiple samples. When the ratio has been greater than 4.0, the XAU has followed with average annualized gains of 27.4% (though the finer profile of returns has been sensitive to other conditions such as interest rates, economic trends, and inflation). In contrast, when the ratio has been less than 3.0 (meaning that the gold stocks are very elevated relative to the actual metal), the XAU has declined at an annualized rate of -36.6%, on average.

“Importantly, the return/risk profile for precious metals shares is strengthened further if the economy is experiencing weakness. For example, when the Gold/XAU ratio has been greater than 5.0 and the ISM Purchasing Managers Index has been less than 50 (indicating a contracting U.S. manufacturing sector), gold shares have appreciated at an average annualized rate of 125.6%. In contrast, when the Gold/XAU ratio has been less than 3.0 and the Purchasing Managers Index has been greater than 50, precious metals shares have plunged at an average annualized rate of -49.9%.”
John Hussman
Such strong periods for gold are also generally associated with weakness in the U.S. dollar. Short term the dollar seems to be stronger. But there is no doubt in my mind that the economy is weakening. Here are the recent ISM reports.

ISM PMI values above 50 indicate expansion. Values below 50 indicate contraction.
see : http://www.ism.ws/ISMReport/PastRob.cfm





ISM PMI - ROB Report on Business | ISM Services Index
of Manufacturer's Business Activity Index| or Non-Manufactuering Business Activity
_________________________________________ | __________________________________ ALSO ANNOUNCED IN REPORT ON BUSINESS:
Announcement Announced and | Announcement Announced Revised (1) (2) (3)
For Period Date ISM PMI as revised | Date Non-Mnfg ISM PMI to New Orders Employment Production (bus activity index)
__________ ______________ ____________ __________ | ____________ ________________ _________ __________ __________ __________

Feb 2009 | Mar 3, 2008 . | Mar 5, 2007
Jan 2008 | Feb 1, 2008 50.7 . | Feb 5, 2007 44.6 43.5 43.9 41.9
Dec 2007 | Jan 2, 2008 47.7 . | Jan 4, 2007 53.9 53.9 51.8 54.4
Nov 2007 | Dec 3, 2007 51.9 . | Dec 5, 2006 54.1 51.1 50.8 51.5
Oct 2007 | Nov 1, 2007 49.6 . | Nov 5, 2006 55.8 55.7 51.8 50.0
Sep 2007 | Oct 1, 2007 54.6 . | Oct 3, 2006 54.8 53.4 52.7 50.5
Aug 2007 | Sep 4, 2007 56.1 . | Sep 6, 2006 55.8 57.0 47.9 50.5
Jul 2007 | Aug 1, 2007 53.8 . | Aug 3, 2007 60.7 56.9 55 50.5
Jun 2007 | Jul 2, 2007 56.0 . | Jul 5, 2007 60.7 60.3 51.1 62.9
May 2007 | Jun 1, 2007 55.0 . | Jun 5 2007 59.7 57.4 54.9 .
Apr 2007 | May 1, 2007 54.7 . | May 3 2007 56.0 55.5 51.9 .
Mar 2007 | Apr 2, 2007 50.9 . | Apr 4 2007 52.4 . . .
Feb 2007 | Mar 1, 2007 52.3 . | Mar 5, 2007 54.3 54.8 52.2 .