Last Chance For Gold To Rally?

• The Long-Term Picture
• Price Action Characteristics are Bearish
• Gold Share Breadth is Negative
• The Now or Never Chart

The Long-Term Picture

Gold was in a secular bull market between 2001 and 2011. It then sold off into 2014 and has been essentially range bound ever since. Chart 1 shows that it hasn't really been doing a good job over the last six years as an inflation hedge. Indeed, the inflation adjusted price registered its high way back in 1980, at a slightly more elevated level than it achieved in 2011. In the last few months, it has slipped decisively below the neckline of a large upward-sloping head and shoulders top. Please note that the chart has only been plotted up to early September, so it does not reflect the small October rally. Adding to the bearish picture is the fact that the price is below its 24-month MA; furthermore, the MACD is declining and trading below its signal line.

Chart 1

Chart 2 compares the nominal price to a PPO using the 6- and 15-month parameters. The PPO goes bullish for gold when it crosses above zero, i.e. when the 6-month MA has surpasses its 15-month EMA counterpart. We can trace this indicator back to the early 1970s. Interestingly, there have only been a handful of whipsaw signals, making it a pretty reliable benchmark. One these false negatives has been highlighted by the 2016 ellipse. A zero crossover, then, typically offers a reliable indication that the long-term price trend has reversed. Recent signals have been flagged by the green and red arrows. Historically, there have been several periods when it was possible to construct a trend line for the oscillator, the violation of which was followed by a very worthwhile move. Two examples are featured in the chart. A third took place in the last summer, which is why I think that the latest negative zero crossover signal is unlikely to be a false move.

Chart 2

Another reason arises from the fact that the Dollar is in a primary bull market; gold typically moves inversely with the Dollar. The word “typically” has been emphasized because this is not a hard and fast rule. We can see this from Chart 3, where the white areas generally reflect divergent periods. Note that the Dollar has been plotted inversely to correspond with swings in the gold price. The red-shaded areas show when the Dollar is rising (plotted version falling) and gold itself is falling. Green shows the opposite. The dashed blue arrows indicate when the Dollar is trending but gold remains in a trading range. It doesn’t look like much on the chart, because of the 60-year history, but both series have been losing ground since the turn of the year, thereby indicating the likelihood of a bear market.

Chart 3

Price Action Characteristics are Bearish

Chart 4 tells us that price action since the summer of 2016 has been bearish as well. The red and green arrows above the price allow us to categorize the primary trend with the benefit of hindsight. The parallel lines plotted against the 9-week RSI show that, in a rough sort of way, the range of the RSI tends to be higher in a bull market and lower in a bear. In a bull market, overbought (blue) areas last a long time and do not generate much in the way of a decline. On the other hand, the price is very responsive to an oversold condition, which it rarely achieves. The reverse is true in a bear market, where oversold conditions are plentiful and often do not generate much in the way of a rally. Prices are very sensitive to overbought conditions and generally sell off when reached. Since late 2016, we have seen a couple of deeply oversold readings and some instances when prices have been very responsive to overbought conditions. In short, during the last two years, this momentum indicator has reflected bear market characteristics.

Chart 4

Gold Share Breadth is Negative

We see the same type of bearish characteristics emanating from the bullish percentage indicator for gold shares, which has been plotted in Chart 5. Using the benefit of hindsight, the bear market areas have been shaded pink. It is fairly evident that this indicator behaves in a similar manner to the RSI in the previous chart. Note that it has not come close to registering an overbought reading since prices peaked in June 2016. Moreover, the price itself recently violated its 2016-18 red uptrend line, which suggests the likelihood of further price erosion once the retracement rally has run its course.

Chart 5

Chart 6 tells another bearish story, as the gold share A/D Line recently broke to a new low. This action compares to that of the GDX itself, which experienced a series of rising peaks and troughs. That’s not necessarily the kiss of death, but I would rather see the shares leading the metal higher. The green and red arrows point up the fact that, generally speaking, the shares do lead the metal.

Chart 6

The Now or Never Chart

The evidence from the long-term indicators is certainly bearish, but it would not take a lot to reverse that trend. Chart 7 shows that both the short- and intermediate-term KSTs are currently in a bullish mode. Hence the title of this article. If it is going to turn around, now would be as good a time as any, since a nice short-term thrust could propel the price above resistance at the red and green trend lines. Since clearance of the green line would also complete a very large base, such action would represent strong evidence that a new primary bull market in the price of the yellow metal is underway.

Chart 7

As things stand right now, though, the long-term indicators are bearish, so a cautious stance is appropriate.

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.