Gold Faces A Critically Important Technical Test In The Weeks Ahead

• Gold’s long term trading range
• Watch those Gold shares for clues about Gold
• Hail Silver?

Gold’s long term trading range

Gold is often regarded as a safe-haven investment, but is more normally held as a hedge against inflation. Chart 1 deflates the price by the CPI, so you can assess how it has performed in the last 50 years. Of course, it depends on where it is bought, but 1980 remains the high-water mark. The price of the yellow metal has not been a great inflation hedge since then!  Right now, it seems to me, that Gold is at a pretty crucial long-term juncture point, which could well be resolved in the next couple of months or so. Let’s look at the long-term technicals, subsequently drilling down to the near term for some clues. First, Chart 1 shows that the price violated its secondary (red dashed) up trendline in 2013 and has since been caught in a trading range. That trading range could be the right shoulder of a massive head and shoulders top as indicated on the chart. In Gold Trust ETF (GLD) terms that breakdown would come with a drop below$105.

Chart 1

Alternatively, Chart 2 suggests that recent GLD price action is actually a bullish reverse head and shoulders. It’s completion would require a decisive month-end close above $130. The KST in the bottom window of Chart 1 is technically bearish but, being close to the equilibrium level, could easily move in either direction given some leadership from the price itself. In other words, things are pretty finely balanced.

Chart 2

Chart 3 zeros in on the last few years of GLD price action, where we can see that the price recently broke out from a downward sloping reverse head and shoulders and the 65-day EMA. The extended breakout trendline and the EMA are both just below $118. The bullish intermediate KST, in the bottom window, says it will hold, but the still bearish short-term KST throws some doubt on this possibility.

Chart 3

Moving down to the daily charts, it is evident that the price of the Gold Trust (GLD) has fallen back to important support in the area of the solid green trendline and 200-day MA. The real challenge comes from the fact that the short-term KST has just triggered a sell signal. Such action could generate some downside pressure, taking the price to a must-hold support in the $118-119 area. That level is a significant chart point, because the three trendlines and (blue) 50-MA are all residing there. The equivalent price for the actual metal ($Gold) is $1240.

Chart 4

Watch those Gold shares for clues about Gold

A key relationship that can throw light on the technical position of the Gold market is the ratio between the shares and metal. It’s not perfect, but certainly closer than say, copper and copper stocks or oil and energy stocks. Generally speaking, a rising ratio is bullish for Gold and vice versa. It’s when they disagree that a message is given. Chart 5 shows the generally close relationship between the ratio and the metal, together with a bearish and bullish disagreement. Currently, Gold is holding above its 2016-17 up trendline but the ratio has violated its equivalent line. Moreover, the small dashed red arrows point up the fact that the ratio has registered a 2017 new low, whereas the metal has not. Since the shares are more leveraged and discount the average future Gold price, this is not a positive sign.

Chart 5

Another area worth study is the relationship between junior and senior Gold shares (GDXJ/GDX). A rising ratio reflects an improving level of confidence, as traders favor the more risky juniors over their relatively  more conservative larger cap counterparts. We don’t have a lot of data on the juniors, but what does exist suggests that this relationship is a useful analytical tool. Chart 6 compares the GDX itself to the GDXJ/GDX ratio. The pink shaded area reflects the 2012-17 bear market for Gold shares. During this period the ratio is declining, which indicates deteriorating confidence. The opposite is true for the white areas, that reflect primary bull markets. Note how the ratio was quite firm between February 2016 and February 2017. It then broke to the upside, which looked very promising at the time. However, that break turned out to be false. This has been subsequently confirmed by the ratio penetrating its 2016-17 up trendline. This relative lack of confidence in the junior Golds puts a nasty dent in the overall case for an upside breakout in the Gold price itself.

Chart 6

Hail Silver?

Silver and Gold often move in tandem. When Silver is rallying, this strength in the more speculative of the two metals, adds to the positive technical case for Gold. Weakness in Silver is therefore a negative sign for the yellow metal. In this respect, Chart 7, which features the weekly price, tells us that Silver recently experienced a false upside breakout. It has subsequently fallen back below its 65-week EMA. It’s not a decisive break yet, but the small green and red arrows point out the fact that this EMA has acted as a very important resistance point for rallies and support for declines. That means that a decisive break below it would carry more weight than usual, thereby increasing the odds that the upside breakout really was a whipsaw. Were that to happen, the next test would be the neckline of a potential upward sloping head and shoulders pattern at just above $15. Note that the short-term KST recently attempted to rally, but has now reversed to the downside. That sort of thing happened in late 2012 by the ellipse.

Chart 7

Finally, Chart 8 features the daily price action of the gray metal. The false break from the 2015-17 inverse head and shoulders has now been confirmed by the violation of the trendline connecting the head with the potential right shoulder. We may well see the price move sideways as it digests recent losses. Ultimately though, it is likely that the bearish KST will add further downside pressure.

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.