What Can We Learn From Recent Gold Price Action About Where Commodity Prices Are Headed?

• Using Gold as a barometer for commodity prices
• Gold versus other precious metals
• Gold and the stock market

Earlier in the week I wrote an article pointing out the fact that the Gold price ($GOLD), technically speaking, had reached, what seemed to me, to be a critical technical point. That was because it had fallen below some key long-term moving averages. Furthermore, it needed to take advantage of the current oversold condition and rally back above these averages, otherwise a full fledged bear market was likely to follow. I also pointed out that Gold has a strong tendency to lead commodities, so its critical technical structure may well have wider implications.  These leading characteristics are reflected in Chart 1. In this article I would like to take this concept a step further.

Chart 1

Using Gold as a barometer for commodity prices

The reason for my interest lies in  the fact that if the long-term sell signals for $GOLD are for real, then they represent an advance warning of a bear market in commodities. Chart 2 indicates that when $GOLD moves above its 12-month MA this is usually followed by some kind of rally in the CRB Composite ($CRB). You can see that from the slightly sloping green dashed arrows and the width of vertical green shading as it flags the amount of lead time between Gold’s buy signal and the $CRB’s response. The wider the shading the longer the lead, and vice versa. The fuchsia colored arrows show that once the $CRB confirmed the Gold signal with one of its own, commodity prices typically experienced a nice bull market. This is not a perfect relationship, as you can see from the confusing period in the late 1970’s indicated by the ellipse; also the sub par 1990 and 2000 advances. By and large though, a positive response by the $CRB to a previous positive 12-month MA cross by Gold offers a reliable signal of a forthcoming commodity bull market. Right now though, I am more concerned about what happens when Gold crosses below its 12-month MA, as was the case in November.

Chart 2

Chart 3 shows this situation, where we have the same arrangement as in Chart 2, but this time for $GOLD sell signals. Again we have that confusing period around the late 1970’s, where commodities took their time in responding to an explosive Gold rally. Nevertheless, the system still worked in the sense that pretty well all the Gold sell signals that were confirmed by a negative $CRB 12-month MA cross, were followed by a bear market in Commodities. The two variables are the magnitude of the ensuing move and the lead time between the Gold signal and the CRB confirmation ($CRB). For example, the lead time,  in 1983 and 1988 was just over a year, but in 2008, the two signals were almost instantaneous. Right now, we are left with the situation in which Gold has triggered a sell signal by dropping below its 12-month MA, but that this has not yet been confirmed by the $CRB, which is close to a cyclical high.

Chart 3

We cannot say that commodities are about to cross below their MA, but we can say that if they do, this would likely indicate a primary bear market. On the other hand, if the short-term oversold condition for Gold triggers a short-term rally that takes prices decisively back above the $1253 area i.e. the 12-month MA and the $CRB remains above its MA, this would be the formula for a tremendous rally in both Gold and Commodities.

Gold versus other precious metals

Charts 4, 5 and 6 plot the Silver(SLV), Platinum(PPLT) and Palladium(PALL) ETF’s, together with their long term KSTs. The third panel of each chart compares their relative strength against the Gold price.

Silver (SLV) has already violated its 2011-16 down trendline in both relative and absolute price action. It now looks to be in the process of completing a base and the two rising KSTs argue that they will be successful in this regard.

Chart 4

Platinum (PPLT) looks less robust than Silver since it has yet to break either downtrend, though here again, the rising KSTs are positive.

Chart 5

Finally, Palladium (PALL) has tentatively completed a 2015-16 reverse head and shoulders, whereas its RS line with Gold has experienced a more decisive one. Since both KSTs are in a positive mode I am expecting to see a stronger absolute and relative performance.

Chart 6

Gold and the stock market

$GOLD can also help in forecasting major moves in the equity market. Before we get to that, Chart 7 features  the ratio between stocks and Gold, where it looks as though an upside breakout favoring stocks is iminent. Further evidence in that direction is given by the bullish intermediate KST and the fact that its long-term counterpart has just started to reverse to the upside.

Chart 7

Chart 8 puts this in perspective because it shows that trendline violations by the ratio($GOLD:$SPX), when confirmed by similar breaks in the S&P 500 ($SPX) itself, have traditionally been followed by persistent up or downtrends in equities, depending on the direction of the break. You can also see that both series violated their respective dashed green secular or very long-term trendlines around 2013, thereby setting the scene for a major equity advance. Right now the ratio is right at  an 11-year resistance trendline, which Chart 7 says will soon be violated. Since the S&P itself has already broken to the upside, a break by the ratio would signify substantially higher stock prices well into 2017, and possibly beyond.

Chart 8

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.