We are going to start things off today with a chart of gold futures prices in terms of the euro. The topic has to do with the potential for a major trend change. By ‘major trend change’ we are referring to the kind of theme change that seems occur every decade or so. In other words... this is a big deal.

The gold/euro bottomed between 1998 and 1999 following the Asian crisis and the cycle lows for crude oil and copper prices. During the early stages of the rally much of the focus was on the tech sector as the Nasdaq led the cyclical recovery higher into 2000.

Energy prices dominated the theme during 2004 but by mid-2005 gold/euro was back to making new highs. The price worked through a number of corrections along the way until the ‘big round number’ of 1000 was finally reached last month.

Below we show the sum of the Canadian and Australian dollar (CAD plus AUD) futures.

We will argue that ‘the trend’ from roughly 1999 into 2010 was dominated by Asian, Latin, and emerging markets growth along with commodity prices. We will show the offset to this on the following page. The point, however, is that for more than a decade growth has been associated with those themes that tend to favor the commodity currencies.

Returning to the gold/euro chart the most obvious point might be that prices have recently started to weaken. Yet... prices have corrected lower on any number of occasions over the past few years only to be supported at or just below the 200-day e.m.a. line.

On page 7 we have included a comparison between gold/euro from 2010 and the Nasdaq from 2000. Our focus is on the way the Nasdaq Composite Index made a ‘top’ around the moving average lines between March and October of that year.

The point? A major trend change alters all kinds of relationships. To the extent that gold in terms of the euro represents at least a few of the facets included in the trend that has run since 1999 we will have to pay particular attention to this if, as, or when the price challenges the moving averages later this year. If the 50-day e.m.a. crosses down through the 200-day e.m.a. then our view is that most themes that have worked for investors over the past decade will simply stop working as new leadership emerges.

Below is a chart comparison of IBM, Wal Mart (WMT), and Coca Cola (KO).

The first page point was that the dominant theme since roughly 1999 has included commodity prices and foreign growth. Another way of putting this would be to suggest that the dominant theme since 1999 was virtually everything NOT U.S. large cap.

The charts show that all three of these stocks have languished since hitting peaks between 1998 and 1999. The offset to ‘foreign growth’ and ‘rising commodity prices’ has been a long period of price consolidation for U.S. large cap names.

Let’s see if we can’t find some way to follow the bouncing ball here.

Gold in terms of the euro (gold/euro) is one facet of the trend. From a chart perspective the rise through 1000 by gold/euro in June had the look of a cycle-ending top. This may or may not prove to be true but this represents the thesis that we are working with.

The offset to gold/euro is ‘U.S. large caps’. To argue that gold/euro has made a top is likely another way of arguing that the long consolidation for IBM, KO, and WMT is coming to an end. It may not become obvious for months or even years but this does seem like a somewhat rational conclusion.

What we would like to see is new highs for one or more of these names. We have argued on occasion that IBM may lead to the upside given its near proximity to the top of the trading range. IBM cracked lower following the release of last quarter’s earnings but has since regained most of the losses.

The point is that on any given day one will probably read or hear about how exciting the growth story is for gold, commodities, Latin America, or even Asia from any number of sources. This makes sense simply because all of these markets have represented the ‘dominant theme’ for more than a decade. It makes even more sense when one considers that all of these trends are still positive.

Our argument is simply that gold/euro reached ‘1000’ and has started to correct lower. It has done this on many occasions over the past few years and each decline has represented a buying opportunity. We do not and, indeed, can not argue that ‘this time is different’ simply because it is still far too early to make that kind of assertion.

To put this into some kind of perspective we show below a chart of gold futures (gold in terms of the dollar this time) and the cross rate between the Swiss franc and euro.

If we run a trend or support line up underneath gold futures prices from mid-2009 to the present day then we can ‘see’ why gold prices declined this month and why they stopped falling after Tuesday’s blood letting. Gold prices in terms of the dollar are still in a rising trend and have simply corrected back to support. The argument here would be that it makes little in the way of sense to suggest that the dominant theme since 1999 has come to an end as long as gold prices aren’t even capable of breaking the rising trend that began a year ago. Take gold futures down through the 200-day e.m.a. line (roughly 1130) and things start to get just a bit more interesting.