Is it Time to Buy Gold?

The gold price peaked last August and has been zig-zagging down ever since. The approximate loss from the high has so far been just north of 15%. During that period, sentiment numbers have been slowly eroding, but not to bearish extremes, so is now a good time to buy? It could be, but an examination of the long-term indicators gives us mixed signals.

Long-Term Bullish Indicators

Chart 1 compares the quarterly gold price to a Coppock Indicator. The green-shaded areas approximate periods when the indicator is in a rising mode. It's pretty evident that these are bullish periods for the actual price. To be sure, there are a few instances of a decline developing under a "green" environment, such as the 2016 and 2018 declines. Generally speaking, though, bear markets have been confined to the unshaded periods when the indicator has been falling. Right now, it is in a rising mode, so is classified as bullish.

Chart 2

Chart 2 uses a PPO incorporating the 6- and 15-month parameters. It goes bearish for gold and earns some orange shading when the oscillator is below zero. Those periods also tell us when the 6-month is above the 15-month EMA. Note there have been very few whipsaw signals (flagged by the red and green arrows) generated in the last 40 years or so covered by the chart. It has remained bullish throughout the recent decline, but is rapidly approaching that zero line again.

Chart 2

Right now, these two charts are bullish for gold long-term, but any additional weakness could easily tip them into negative territory.

Negative Indicators

That's where the long-term KSTalready is, as we can see from Chart 3. Not only is it negative, but it remains at a pretty overstretched reading, hinting that a long corrective period may lie ahead. Also, the price has moved fairly decisively below its 12-month MA. That's not a perfect arbiter between bull and bear markets. History, though, has shown that it's generally better to be on the bull side of the average.

Chart 3

Chart 4 compares the gold price to the gold/stock ratio, along with the KST of the ratio. There is not a lot that can be learned from this relationship as far as the trend of the gold price is concerned. What we do find is that, when the long-term KST for the ratio is declining and gold also moves below its 12-month MA, this is generally not a good development for gold itself. We can see this from the gold action contained in the red-shaded areas, which is generally bearish. Right now, the KST is in a negative mode and the gold price is below the average, so a bearish environment is being signaled. That said, the ratio has reached a 15-year support trendline. If it drops below it, that would obviously be bearish for the price of the yellow metal, especially as such a break would confirm the false 2020 upside breakout.

Chart 4

Short-Term Characteristics

I recently wrote an article concerning short-term overbought and oversold characteristicsto see how they can provide clues as to the direction of the main trend. One of the characteristics of a primary bear market are false upside breaks or patterns which fail to complete. Charts 5 and 6, for gold shares and gold respectively, show that, so far, every attempt at an upside breakout has either been unable to materialize or, worse, failed to hold. During a bull market, we expect to see a strong rally develop from an oversold condition. We do not see that with Chart 5, featuring Van Eck Vectors Gold Miners ETF (GDX). Indeed, the paucity of overbought conditions is a hallmark of bear trends.

Chart 5

These characteristics are also present in Chart 6, featuring the SPDR Gold Trust (GLD), moreso because the oversold readings are lower and more prolonged. Now both series have another chance to prove their mettle with the formation a potential base, a reverse head-and-shoulder for the GDX and a double bottom for the GLD. It will certainly be instructive as to whether Thursday's breakout can change the pattern of the last year by actually holding for more than a couple of sessions.

Chart 6

Gold Conclusion

The long-term indicators are mixed and the short-term ones are trying to break out. It's conceivable that the current rally could take the price back above its 12-month MA. If so, that would tip the balance of evidence into the bullish camp. For the record, the average is currently at $1833 for the gold price itself and $172 for the GLD. For its part, the 200-day GLD MA is at $174.

What about Stocks?

Chart 5 may have inspired you may to ask what might be the implication for stocks in their own right, should they break in favor of gold. The answer is contained in Chart 7, which reverses this ratio from Chart 5. Now, a rising line means that stocks are the superior performers. The green-shaded areas tell us when the KST for the ratio is above its MA. There have been six buy signals since 1997. End was followed by a nice rally in the S&P. A seventh buy signal was recently triggered. Since the KST has only just begun to traverse its equilibrium level, it seems likely that there is much more upside potential yet to be realized, far more than is required to push the ratio above its resistance trendline. Remember, this is a relative relationship, so even if stocks break out, that does not preclude gold from rallying as well. Bottom line: whatever gold does, stocks look to be the better bet in the event that they experience a Chart 7 breakout.

Chart 7

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 Groupof Walnut Creek or its affiliates.

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