Gold Starts To Break Down - But Is It For Real?

• The Long-Term Picture Looks Positive
• Gold’s Tuesday Downside Breakout Could Be the Spoiler
• Platinum is Trying to Break Out Against Gold - Why That’s Important for the Economy

The Long-Term Picture Looks Positive

Over the last 6 years, it appears that the gold price has been trying to form a massive base. If completed, it could form a platform capable of supporting a significant rally to new all-time highs. Until it can, though, that range-bound price action is a potential, not an actual base.

That said, the long-term signs are definitely encouraging, as gold continues to trade above its 48-quarterly MA, which itself is in a rising mode. Since the 1980s, this average has been pretty reliable at identifying major trends in the price. Several signals may have come a little late, not surprising given the average’s 12-year time span, but they have typically been followed by very worthwhile long-term price moves. Rounding out the constructive long-term technical picture is the Coppock indicator, which is also in a bullish mode. That’s typically been a positive factor for the last 45 years or so.

None of these developments qualify as a breakout, of course, but this positive action nonetheless provides a positive background that enhances the possibility of one. On the other hand, should the price drop decisively below the MA at $1245 on a quarterly close basis, that would definitely threaten an otherwise bullish long-term position.

Chart 1

Chart 2, which features monthly close data, really underpins the fine, though constructive, technical balance that currently exists. On the one hand, the red trend line could be the neckline of an upward-sloping head-and-shoulders top. That does not seem likely, as it had a missed chance to break down last fall where the subsequent violation turned out to be a whipsaw. On the other, the green dashed resistance trend line could mark the top of that potential base we saw in the previous chart. Since the two lines are extremely close to each other and the KST is right at its signal line, the moment of truth could well be upon us.

Chart 2

Chart 3 elaborates further on the fine technical balance. This chart compares the daily price to its Special K, which you can read about here. The three thick red and green arrows flag periods in the past when it has been possible to construct a trend line for both series and observe their joint violation. Currently, the Special K is above its signal line but right at its 2012-2019 downtrend line. The daily close gold price is at $1350. Note that that is also in the area of the extended red uptrend line, which just adds to the significance of $1350 as a resistance zone.

Chart 3

Gold’s Tuesday Downside Breakout Could Be the Spoiler

Just when everything looks right for an upside break, Chart 4 shows that the price of the SPDR Gold Trust (GLD) completed and broke down from a head-and-shoulders top on Tuesday. Is that going to act as a spoiler for the big breakout? Only time will tell. I am assuming that the break is for real until the price can rally back above the green downtrend line.

There are three reasons why the break may fail. Firstly, the RSI is already oversold, meaning that, if this is a false move, it will likely be cleared up in pretty short order, much as the three previous oversold instances flagged by the green arrows were.

Chart 4

Second, Chart 5 shows us that the gold shares have not confirmed with a break of their own (at least so far). That's significant, as the shares often take a leading role.

Chart 5

Finally, Chart 6 shows that the silver price tried to violate its support trend line on both Monday and Tuesday, but, by both closes, had rallied back to the line. Of course, if it now goes on to unsuccessfully test Monday’s low, all bets are off. However, it would seem that silver had every opportunity to follow gold’s downside leadership on Tuesday, but, after a quick flirtation on the downside, chose not to participate by the close.

Chart 6

Platinum is Trying to Break Out Against Gold - Why That’s Important for the Economy

Chart 7 plots the platinum price and compares it to its long-term KST. The solid arrows show that most KST buy signals have been timely in calling major rallies in the platinum price. The two dashed ones tell us that this is not a perfect approach. However, when it is possible to combine one of these momentum signals with a multi-year trend line violation of the price, the signals have been particularly powerful. In 1985, for instance, we saw a simultaneous KST buy signal, trend line violation and positive 24-month MA crossover. Fast forward to the present, we have a similar potential setup forming as all three indicators are poised for an upside breakout.

Chart 7

Monitoring for a potential breakout is worthwhile for two reasons. Firstly, there isthe obvious effect on the platinum price itself. Secondly, perhaps more importantly, there isthe potential for a positive effect on the economy.

Chart 8 features industrial production (as a proxy for the economy) together with platinum’s relationship with gold as a signaling device. To be more precise, the lower window contains the long-term KST for the ratio between platinum and gold. The idea behind this relationship is that the price of gold is buoyed relative to platinum when traders and investors are in a defensive mood. Either they are concerned about future inflation and bid it up or, alternatively, they see the yellow metal as a defensive hedge during an equity bear market and buy for that reason. Platinum, on the other hand, trades more as an industrial than a precious metal. When platinum is out-performing gold, as reflected by a rising KST, this is good for the economy, as it tells us traders are more interested in placing bets in favor of the economy than in playing defense. The arrows in Chart 8 show us that when the KST goes bullish, so too does industrial production.

Chart 8

Right now, this smoothed momentum indicator has started to turn up, but has not quite triggered a buy signal with a positive MA crossover. A lot will probably depend on the performance of platinum itself, so it’s worth monitoring a possible upside breakout in Chart 7. If that takes place, it will represent one piece of evidence that the much touted economic growth slowdown is over.

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.