Is The Price Of Gold Still In A Bull Market?

• Long-term perspective
• What are gold shares saying?
• Gold and the dollar
• Conclusion

The question of whether gold is in a primary bull market keeps coming up in the Q & A part of my bi-weekly Tuesday webinars. Given the recent drop in the price, this question is becoming increasingly relevant. I am looking at the problem from three aspects. First, what are the longer-term indicators saying? Second, is the relationship between the price of the metal and the shares of the mining companies providing any clues? Finally, is the dollar a big factor in all of this?

Long-term perspective

Let’s consider the position of the long-term indicators first. Chart 1 compares the gold price to its long-term KST. The first test I give any market is to see whether the price is above its 12-month MA and the KST is above its 9-month smoothing. This is by no means a perfect approach, but it does offer an initial assessment. One of the things to check is whether 12-month MA crossovers have been reliable in the past and whether this time span has also acted as a reliable support/resistance pivot point. The ellipses show when this technique has resulted in inconvenient whipsaws. Note that I have excluded one-month penetrations for this exercise. Generally speaking, I think we can say that MA crossovers have acted reasonably well, especially in the last 14-years. Right now the price is a tad above the average (support) and the KST is bullish, so too is the model.

Chart 1

Chart 2 shows that the Special K, a long-term momentum indicator, broke out from a large base at the beginning of the year and remains in an uptrend, just above its red signal line. That line often represents a pivotal point on the charts. One exception occurs during the formation of a trading range, such as the large base, previously mentioned. The price itself is currently just above support, in the form of the 200-day MA, so there is a good chance that it marks the correction low.

The one negative lies in the fact that both the price and Special K have violated their 2016 up trendlines. That demonstrates a loss of upside momentum. For this reason, we will need to keep a close eye on the Special K. If the price continues to hold up, and the momentum indicator zig zags lower, that will be a negative sign.  Note that that is exactly what happened in early 2012, as flagged by the orange arrows. At that time the price rallied back to test its high but the Special K continued to move lower. Eventually, the price followed suit. The trendline breaks in the current situation are less significant because of the brevity of the lines. Nevertheless, the situation deserves close monitoring.

Chart 2

What are gold shares saying?

Chart 3, shows that the Van Eck Vectors Gold Miners ETF (GDX) moves very closely with the price of the yellow metal itself. Consequently, if one can make a bullish case for the shares it follows that this is also a favorable factor for the gold price.

Chart 3

Adapting our objective long-term KST test with the Gold Bugs Gold Share Index ($HUI), you can see that the Index is well clear of its 12-month MA and that the KST is in a rising mode.  With the shares moving in sympathy with the metal there are certainly no cracks in this technical structure.

Chart 4

Chart 5 features the near-term gold miners picture, as we return to the GDX. It shows that the bullish percent, calculated from a basket of gold shares in bullish trends, has almost fallen back to its dashed green oversold zone. When compared to the 2012-2015 period this does not seem to be all that remarkable. However, it’s important to note that this was a primary bear market environment, as flagged by the pink shading. There is a technical rule that states that prices are not as sensitive to oversold conditions in bear markets as they are in bullish trends. It’s certainly apparent that the oversold conditions in the shaded areas did not generate much in the way of a rally. Compare that to the price response following the oversold readings indicated by green arrows, which all developed during the course of a primary bull trend. Consequently, if the bull market is intact, as the long-term indicators suggest, then there is a high probability that both gold and gold shares will rally from here.

Chart 5

Chart 6 also features the GDX, but this time with a daily Advance/Decline (A/D) line constructed from a universe of gold shares. Note how joint trendline penetrations of the A/D Line and price often result in important changes in trend. Right now we are still on the bearish intermediate breakdown that took place last August. However, the A/D Line is very close to an upside breakout. If this is confirmed by a move above the $26 level on the $GDX, that would strongly suggest that the correction is over, thereby leaving both the gold mining shares and the metal to register new bull market highs.

Chart 6

Another hint that the correction may have run its course comes from Chart 7, which shows that the daily KST has just started to reverse its downward trajectory. It’s not yet fully bullish of course because it is still below its MA, but a couple of days of stable prices would probably do the trick. One area to watch is the support level around $22, because a break below that point would confirm a small head and shoulders top.

Chart 7

We are getting a more constructive message from Chart 8. The three rate-of-change (ROC) indicators, all representing different cycles, are very close to violating 4-month down trendlines,  in a similar manner to the January 2016 experience.

Chart 8

Gold and the Dollar

Most of the time, Gold and the Dollar ($USD) move in different directions. In that respect, Chart 9 compares gold to the inverted Dollar Index. It’s true that the broad swings in the price of the yellow metal and the US currency are very similar. However, the shaded areas and arrows show when the two series either move in the same direction, or when one experiences a trading range but the other does not.  The point is, that it’s nice to have the dollar falling if you are bullish on gold, but not always necessary. For example, one of the best moves ever, for gold, developed in 1979 as the dollar was rising (inverted dollar was falling). Two other green shadings in 2006 and 2010 demonstrate smaller instances of the same phenomenon.

Chart 9

Conclusion

The long-term indicators continue to flag a primary bull market. However, prices have returned to major support in the form of key moving averages. We are now in the testing phase. Since the gold shares especially, are oversold, the market is primed for an advance. One key benchmark will be to see if the GDX can experience a daily close that can hold above $26.

Good luck and good charting,
Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group or its affiliates.