By Jochen Stanzl, Chief Market Analyst, CMC Markets Ever since gold prices topped out around 1,900 in the year 2011 it’s not always been an easy ride for those of a bearish disposition. The few gold bears publicly voicing their opinion have been the victim of critical, even personal verbal attacks in social media, received emotionally charged comments on websites and via e-mail and the credo behind most of those comments has been, all gold bears will be dead wrong. Fast forward three years into what has been one of the most forceful bear markets in gold price history and one must wonder what has happened to all those critical voices given they have totally disappeared. The recent rout in the gold price is only likely to find a base once the bullish sentiment so prevalent in the gold market in recent times has been cleared out, and it is this that could pave the way for a new run higher. Increasing the difficulty level of every market observer though is the fact that it is never about just one single argument, markets can be complex and so is gold. Regrettably for gold bug there are very few arguments that point to an early end of the year-long bear market. There is the Dow-Gold-Ratio for example, which you get when dividing the Dow Jones Industrial Average by the price of Gold. As gold is a direct substitute to stocks in an investor’s portfolio the cycles in the Dow-Gold-Ratio are a good guidance to where we stand in the investment cycle. The ratio has been at an all-time-high in the year 2000 when it reached 44, meaning you would have needed 44 ounces of gold to buy one unit of the Dow Jones Industrial Average. Stocks were in a bubble and gold was cheap, and was the beginning of the bull run in gold in the last decade. In the years that followed, the Dow-Gold-Ratio slid to much lower levels and reached a trough at 5.7 in 2011. This meant that one investor would have needed less than six ounces of gold to buy one unit of the Dow Jones Industrial Average. So back then Gold was expensive. George Soros, the famous investor, was quoted by Bloomberg at that time saying that the price of gold is the “ultimate bubble”. Today we know that this bubble has burst, as the ratio between the Dow Jones and Gold has been on another up-cycle ever since. What this means is that an investor should look to buy dips and corrections in the Dow Jones Industrial Average and look to short any rallies that might happen in the price of gold. As of December 2015 the chart of the Dow-Gold-Ratio is currently giving no technical clues that the ascent of stocks relative to gold is coming to an end soon. To the contrary: An up-cycle in the Dow-Gold-Ratio typically lasts for more than a ten years and when we assume that the year 2011 was the low point of the last cycle it means that the underperformance of Gold relative to US stocks could well last until the end of this decade. Sooner or later, every secular bear market will be interrupted by sometimes violent technical bear market rallies. If the ECB’s reluctance to introduce further quantitative easing measures are not a communication mistake then the chances that the Euro will hit parity to the USD have diminished quite a bit. There is strong support in the EUR/USD at around the 1.0400 level, where there is a slight chance that the EUR could form a mid-term bottom in the first quarter of 2016. While this is quite a counter-cyclical call and is only valid as long as the support at 1.0400 holds it is one scenario that one needs to take into account after the ECB’s December 3rd decision. One could even argue that the ECB’s reluctance to further QE measures has given the Federal Reserve more room to hike rates as it has weakened the US dollar. If the ECB had eased more on December 3rd, EUR/USD could have sold off, and the Fed would then have been forced to hike rates into an already strong USD. That would have certainly caused some problems for the US economy, which is already suffering from the strong Greenback. As matters now stand this has not materialized thanks to the ECB’s hawkish stance. The fact that the Federal Reserve will be the first central bank going into rate normalization mode has already created a very crowded long US dollar trade. As the ECB and the Federal Reserve must be aware of this it is their task to manage this trade. While the ECB decision has already helped to weaken the US dollar, the Federal Reserve has more tools it can apply to weaken the US dollar as needed, for example by selling off parts of their massive Treasury holdings in their balance sheet with $216 billion of the overall stack of $2,500 billion coming due in 2016. This means central banks could be inclined to prevent any further US dollar strength, which could be a positive for the price of gold going forward. Even if these events play out it still may take a long time for gold prices to bottom out. After the last bull market ended in the 1980s it took the market 19 years to form a bottom. Whether this will happen again or not it would be quote unusual if the bear market in gold seen over the last few years was over after just four years. That being said we do need to be aware of any dollar moves in the weeks ahead as they could be the trigger for a temporary but strong bear market rally in the heavily-shorted price of gold. CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.