Four Reasons Why The Gold Breakout Is Likely To Be Valid

• A Weaker Dollar is Bullish for Gold
• The Gold 6/15 PPO Model for Gold is Bullish
• Global Gold is Breaking Out
• Gold Shares Showing Signs of Strength
• Gold Special K Crossed its Bear Market Trend Line

Last week, Gold experienced an upside breakout from a multi-year base. I always treat such breakouts in the Gold price with a certain degree of skepticism. Back in 1996, I wrote a bullish article for Barron's where I cited what looked, at the time, to be a perfectly good breakout from a 5-year base. That action was quickly reversed and, within 90 days, the price reached a 2-year low, leaving me with a healthy dose of egg on my face. On the beneficial side, this incident taught me that false breakouts are often followed by above-average moves that develop in the opposite direction of the breakout. That was certainly the case in Chart 1, as the 1996-1998 period was one of consistent weakness.

Chart 1

Let's fast-forward to last week, where Chart 2 shows that the SPDR Gold Shares Fund (GLD) has experienced a solid breakout above its 2013-19 base. Both KSTs are positive; neither is particularly overstretched at the moment. I think there are five principal reasons for believing this breakout.

Chart 2

1. A Weaker Dollar is Bullish for Gold

It is a well-known fact that, most of the time, Gold and the Dollar move inversely. Chart 3 compares the Gold price to a PPO of the Dollar, wherein its 12-month MA is divided by the monthly close. Calculating it this way makes the oscillator move inversely so that its movements correspond to those of the Gold price. A rising oscillator therefore indicates a falling Dollar, which is bullish for Gold. The green-shaded areas represent those periods when the Dollar Index has been trending below its 12-month MA for an extended period and Gold responds positively by trading above its 9-month MA. In the chart, this appears as a positive reading for the price oscillator. Last week, the Dollar dropped below its 52-week MA, which is a positive for Gold. Chart 2 shows that, if last Friday’s close transitions to next Friday (i.e. month-end), the Dollar will also go bullish for Gold on the monthly charts.

Chart 3

2. The Gold 6/15 PPO Model for Gold is Bullish

When a monthly PPO using the 6/15 parameters is applied to the Gold price, a very reliable indicator is created when it crosses above zero, as shown in Chart 4. Bullish periods are flagged by the green-shaded areas. All indicators fail from time to time, but the one red and the two green arrows point out that this particular model has only experienced three whipsaws since 1975. That’s a pretty good record. Right now, the indicator is moving smartly away from the equilibrium point, which suggests that the breakout is for real and the uptrend is a solid one. Since the indicator has also violated a multi-year downtrend line, this bull move is likely to carry some way.

Chart 4

3. Global Gold is Breaking Out

Some while back, I created a Global Gold Index, calculated from Euro-,  Yen- and Dollar-denominated Gold and weighted by GDP. It’s shown in Chart 5 below as a user-defined index, which means that it is, unfortunately, not available to StockCharts members. The idea is to see whether Gold is rising solely in Dollar terms or if the advance is broadly-based. You can see, for instance, that there was no upside break when Gold denominated in dollars was experiencing that false 1996 breakout. Last week, the Index not only broke out from a 6-year base but, unlike Dollar-denominated Gold (which is well below its 2012 all-time high), the global series is right there. There is one caveat, which is that this chart is based on monthly data. However, final statistics for June will not be available until the end of the week. Given that Global Gold has already broken out on a Friday close basis, I feel fairly confident in the expectation that the breakout will extend for the next four days.

Chart 5

4. Gold Shares Showing Signs of Strength

Where the price of the metal goes, the shares will generally follow (or lead). The Gold Miners ETF (GDX) has completed and broken out from a large base, thereby confirming the positive action by the metal. This is shown in Chart 6.

Chart 6

Chart 7 shows that the long decline in relative action for Gold shares has come to an end; they are now expected to out-perform the S&P for a while.

Chart 7

Also joining the GDX is the Gold Bugs Gold Share Index, comprised of stocks that do not hedge their production (Chart 8). In this instance, the Index has successfully violated an 8-year downtrend line.

Chart 8

5. Gold Special K Crossed its Bear Market Trend Line

Occasionally, it’s possible to construct trend lines for the Special K, which you can read about here. When those lines are violated (and said violation is confirmed by the price series it is monitoring), a strong possibility of a trend reversal exists. One such setup has just been completed for the Gold price. Note that in 1996 the Special K was rolling over to the downside, not breaking to the upside as it is today.

Chart 9

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.