Is Gold In A Bear Market Or A Buying Opportunity?

• Long-term trends rolling over to the downside
• A rising dollar does not help gold
• Gold Under-performing stocks is not a good thing….for gold
• Gold showing bear market characteristics

Long-term trends rolling over to the downside

The recent sell off in the price of gold has quite frankly surprised me. That’s not because it has dropped in price, but more because of the relentless way in which this has happened. In a recent MarketWatch article Mark Hulbert, who is usually spot on with these things, reports that his sentiment indicator based on gold market timers indicates that there is insufficient bearishness to justify a tradeable bottom. That’s important because gold is slowly slipping through an important support zone, and if it fails to rally by month-end will likely push many long-term charts to the bearish side. In other words, gold could be on the edge of a cliff and Mark’s interpretation of his sentiment indicator could be the domino that pushes it over.

Long-term trends rolling over to the downside

Chart 1 sets the scene, where you can see that the price violated itsdashed secular up trend line several months ago. Because of the length of that line, its penetration indicated that either gold was likely to experience some multi-year ranging action or an actual price drop. So far, it’s been the latter. Now we have reached crunch time, because the price has dropped back to the neckline of a huge potential upward sloping head and shoulders top, as indicated by the solid red line. The bearish long-term KST, in the lower window, suggests that the solid red line will meet the same fate of its dashed counterpart. The line takes on even greater significance when you consider the fact that its violation will confirm the failure of a potential bullish inverse head and shoulders. The upper part of that pattern has been flagged with the green trend line. Usually, when a pattern such as this does not “work” the subsequent price drop is an above average one.

Chart 1

One of my favorite gold models is a monthly PPO using the 5/15 parameters. It’s shown in Chart 2, where the orange shaded areas flag periods when the oscillator is below the equilibrium level, which means that the 6-month EMA is below its 15-month counterpart. The chart covers 44 years and is remarkably free of whipsaw signals, just three, in fact. They have been flagged by the one green and two red arrows. That’s approximately one false signal every 15 years. I think we can live with that! It looks as if another bearish signal will be triggered this month.

Chart 2

Chart 3 indicates that the odds of a fourth false signal since 1974 are quite low, since both moving averages are already declining, which seems like the downdraft is in a fairly well established trend. Note that the oscillator itself is right on a 5-year up trendline, which once again underpins the tipping point nature of the current technical position.

Chart 3

A rising dollar does not help gold

Another negative for gold is the increasing probability that the dollar is in a primary bull market. I last addressed this subject in May in an article entitled Dollar Breakout Starts To Infect Other Markets. At that time, I put the odds of a new bull market at 50/50. Since that time though, the Dollar Index has broken above its 12-month MA and triggered several other bullish signals, all of which argues that the odds of a primary bull have substantially increased. Chart 4 shows that these two markets move inversely most of the time. The shaded areas tell us when they do not, the arrows indicating when one is trending and the other rangebound. Clearly we cannot say that just because the dollar is rising gold will fall. Merely that such a condition creates a headwind for the gold price. Note also that all the major declines have taken place when the dollar has been rising i.e. in the white areas on the chart.

Chart 4

Gold underperforming stocks is not a good thing….for gold

When gold is outperforming stocks it implies a certain degree of instability, which tends to be bullish for gold in its own right. You can see that from the unshaded areas in Chart 5, pretty well all of which are associated with strong gold rallies. On the other hand, the pink shading, identified with the benefit of hindsight, tells us when stocks are outperforming. That does not mean that gold cannot rally, because there are some pink shaded periods, such as 2003-4, 2006-7 and 2009 when it did. However, gold is usually at its most vulnerable when it underperforms the S&P. I bring this up because the ratio recently broke below its 2007-18 red support trendline, which suggests that the recent trend of superior stock performance probably has much further to run.

Chart 5

Finally, while we are still on the subject of gold’s relationships with other assets, Chart 6 compares the gold price to the gold/bond ratio. This series recently experienced a false breakout to the upside. However, this whipsaw has now been confirmed with a violation of the red support trend line, all of which suggests that gold is likely to underperform both stocks and bonds in the period ahead.

Chart 6

Gold showing bear market characteristics

Oscillators and prices behave in substantially different ways, depending on whether the prevailing primary trend is bullish or bearish. In a bull market, downside breakouts often result in whipsaws, whereas overbought oscillators consistently fail to trigger much in the way of a short term decline. On the other hand, prices are very sensitive to oversold conditions, which means that pro-trend (buy) signals are usually followed by a worthwhile short-term advance. These characteristics tend to reverse themselves during bear markets.

Chart 7 can be split into two periods, that prior to mid-January 2018 and the one afterwards. During the first part we can say that gold was in a primary bull market, and has the characteristics to prove it. First, there were two downside breakouts, neither of which succeeded. Second, six of the nine short-term sells from a peaking overbought RSI failed to generate much in the form of a decline. This contrasts to the four pro-trend buy signals, indicated by the four green arrows. All succeeded by triggering a nice rally.

Compare that to the price action for most of this year. First, there were no false breakouts, so we can’t use that as a bearish factor. However, there were two sell signals, both of which were followed by a significant decline. In addition, there were three buy signals, none of which generated any kind of serious short-term rally. They say if it walks and quacks like a duck it probably is. This gold oscillator action is more reminiscent of a bear, so it probably is.

Chart 7

Right now the RSI is oversold, so some form of contra-trend move is likely, but until the price can show some form of bull market characteristic and that 6/15 price oscillator goes positive, I am assuming the bear is alive and well.

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.