Gold Starting to Look Interesting Again

Gold has rallied nicely in the last few weeks, so the question naturally arises as to whether it's ready to resume its secular bull market. I'll get to that later, but first, a little perspective.

Longer-Term Perspective

Chart 1 plots the real price as adjusted by the CPI. It ran into severe resistance last summer in the form of an extended trendline joining the 1980 and 2011 highs. It subsequently crossed below the 12-month MA and experienced a bearish long-term KST, thereby signaling a primary bear market. That sounds pretty bad, but we should also take note of the fact this signal was likely being triggered under the context of a very long-term or secular bull market, when primary bears tend to be limited in their damage.  The dashed arrows show that a lot of counter-secular signals, two buys during the 1980-2001 secular bear and two in the 2001-20?? secular bull, were associated with sub-par magnitude. I am not saying the current KST signal does not count, merely that sell signals are less reliable under the context of a secular bull.

Chart 2 features a quarterly plot of inflation-adjusted gold and compares it to a Coppock Curve. It's not exactly a secular indicator, since two bullish momentum signals developed during the 1980-2001 bear and one more recently in 2012 in what will likely turn out to be an on-going secular uptrend. In this instance, buy signals are being categorized as a MA crossover, rather than a sub-zero change in direction, as is normal for a  Coppock interpretation. Note that the green shadings approximate the periods when the curve is above its 8-quarter (2-year) MA. Neither the price nor the Coppock Curve have yet fallen below their respective MAs, which suggests that the secular uptrend since 2001 is still intact. To confirm this, a rally above the green trendline that takes the price to a new high is required. Should that happen, it would represent a huge day for gold, since that trendline has been 40 years in the making.

Primary Trend

Chart 3 compares the actual gold price to its long-term KST and a PPO using the 6 and 15 parameters. The basis for buy and sell signals is a zero crossover. In that respect, the green shadings approximate positive PPO zero crossovers. The red and blue arrows point up the very few cases when whipsaw signals have developed in the last 40 years or so. The indicator is currently in a bullish mode.

In order to beat the CPI and act as an inflation hedge, it's important for Gold price to be supported by a trend of declining real interest rates. That concept is reflected in the model featured in Chart 4 (source: Martin Pring's Intermarket Review). The indicator in the bottom window is a price oscillator constructed from a 6- and 18- month simple moving average of the CPI-adjusted yield on the 10-year bond. It's been plotted inversely to correspond with swings in the gold price. Consequently, a rising oscillator represents a trend of falling real rates, which is bullish for gold. Buy and sell signals are triggered when the oscillator crosses above and below zero, respectively. The green highlights indicate when the real rate part of the model is bullishandthis is confirmed by the gold price responding by trading above its 12-month MA. The latest plot is in green because real rates went positive last month.

Also, I have cheated by inserting the latest gold price. However, it won't count unless spot gold remains above its 12-month MA at the end of the month. I am featuring it because the combination of declining real rates and a responsive gold usually results in an extended period of rising prices. Drilling down to the short- and intermediate trends suggests that a positive 12-month MA crossover is more likely than not.

Short and Intermediate Trends

Chart 5 compares the Gold Trust ETF (GLD) to its short and intermediate KSTs. Both have turned bullish, thereby confirming the recent breakout from the post-August corrective period. The three arrows indicate that sub-zero reversals in the intermediate series have often been followed by a worthwhile rally. Note also that the price is currently trading comfortably above its 65-week EMA.

Chart 6 breaks down the last decade into bull and bear markets for the VanEck Vectors Gold Mining ETF (GDX), with the pink shadings indicating negative primary trends. The rationale is to demonstrate that the bullish percentage index experiences different characteristics depending on the direction of the primary trend. Bear markets experience numerous oversold conditions, but they are not followed by much of a rally. On the other hand, bull market oversold conditions are rarer and typically followed by a far more robust advance. Several of the latter have been flagged with the green arrows. Note that this indicator has recently reversed from an overstretched condition and is currently at a relatively subdued reading.

You can also see from the chart that the GDX is rallying sharply and is above its 250-day MA. A gold market powered by both the metal and shares is usually a healthy one.

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.