The Next Two Months Will Be Critical For Gold

• Will the current short-term oversold level in Gold trigger a rally to reverse long-term bear signals?
• Gold leads commodities
• Gold breaks down against some commodities

Will the current short-term oversold trigger a sufficient rally to reverse long-term bear signals?

Earlier in the year $GOLD proved to be one of the best investments on the board, but since the late summer its fortunes have totally reversed. Two things are obvious. First, the price of the yellow metal has fallen below key moving averages, such as the 12-month and 65-week EMA time spans. Second, it has reached an extreme short-term oversold reading. The first implies a bear market and the second a possible rally that could reverse these bear market signals. Chart 1 features the long-term picture, where you can see that the price has really been in a trading range for quite some time. If that range extends, then 12-month MA crossovers will be pretty meaningless. I am focusing on the KST, since it has started to flatten as a possible prelude to a KST sell signal. If so, that trading range will soon be resolved on the downside.

Chart 1

Chart 2 offers some hope for the bulls as both the Money Flow (MFI) and RSI indicators remain close to oversold territory. That should enable prices to experience a bounce of some kind. Whether it will be sufficient to trigger a strong enough rally to take prices back above their long-term MA’s is open to question.

Chart 2

Chart 3 hints at a negative outcome. That’s because the Special K (SPK) has just violated a small, but nevertheless key up trendline. It’s also dropped below its signal line and the price has completed a 1-year head and shoulders top. The fact that the 200-day MA has started to reverse to the downside adds to gold’s bearish woes at this time. It’s true that that SPK trendline is small relative to the three previous examples featured on the chart, but the drop below the signal line from such a low level suggests that long-term upside momentum (and that includes the KST) has reversed to the downside. In other words, it reflects the strong possibility of a weak primary trend rally. The implication is for an unsuccessful test of last year’s low.

Chart 3

Chart 4 shows one of my gold momentum models. This one tries to identify long-term swings when the 6-month EMA crosses below the 15–month EMA of the gold price. The orange shaded areas flag such bearish conditions as the oscillator slips below zero, subsequently rallying back above it. The two red arrows point up the only two whipsaws that have developed since the early 1970’s. That’s not bad for nearly 50-years of history. Right now, the indicator is on the cusp of a primary trend sell signal, so once again that potential for a short-term rally comes into play.

Chart 4

Gold and gold shares are often closely intertwined, as the shares sometimes offer advanced warning of future metal price trends. In this respect, Chart 5 indicates that the Van Eck Gold Miners ETF, the GDX, while below its 65-week EMA is still above its extended breakout trendline, as is the relative line against the S&P Composite. A worrying factor though, is the flattening action of both KSTs, which will need close monitoring in the period ahead.

Chart 5

On a more positive note, Chart 6 compares the metal (GLD) to the mining shares (GDX). Here we can see that the metal recently touched a new low but the shares, which tend to discount average prices and therefore move ahead of the metal, reached their low a few weeks ago. That does not guarantee a rally, but certainly represents a better sign than if the shares were headed for the basement.

Chart 6

In summarizing, it looks as if gold is about to face an important technical test in the form of a rebound from the recent drop.  The quality of that rally needs to be closely monitored for primary trend bullish or bearish characteristics. For now, I would say the odds favor a negative outcome. Especially given the recent upside breakout in the dollar.

Gold leads commodities

I often think of Gold being a discounter of inflation and Chart 7 backs me up on that, as the red and green arrows demonstrate that gold leads most peaks and troughs in the CRB Composite ($CRB). It’s not a perfect relationship, as you can appreciate from the orange ellipse and the dashed red arrow. The main problem from an interpretive aspect is that the lead time varies from as much as 3-4-years in the early 1990’s to a matter of a month or so in 2008. The gold price peaked in July of 2016 and the CRB recently touched one in November, so it would appear that gold is again reverting to its leading role. Of course, it may start to come back and generate new post 2016 highs, but if it does not, that leading behavior would suggest that gold has already started to discount the next commodity bear market.

Chart 7

Gold breaks down against some commodities

Chart 8 compares the gold price against a broad based commodity index, the DB Commodity ETF (DBC).  The recent rising ratio indicates that commodities have broken out against gold, both through the violation of a dashed down trendline and the completion of its 2016 base. The Special K has also followed suit, thereby offering strong evidence of superior performance by commodities over gold. From an investment aspect, it now seems that holding commodities in the form of this ETF, offers greater potential than holding gold. That’s not the same thing as saying commodities will go up and gold will go down, merely that commodities are likely to be the superior performer.

Charts 9,10 and 11, all suggest that this better commodity performance will be broadly based, as copper, oil and the Bloomberg Agricultural ETN have all violated long-term down trendlines against the yellow metal, and experienced positive KST action.

Chart 9

Chart 10

Chart 11

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 of Walnut Creek or its affiliates.