Gold Breaks Out for the Fourth Time in the Past Year -- But is it for Real this Time?

Since its August 2020 high, gold has been a very tricky market to call. Let me put it another way; it has been easy to call, but exasperatingly difficult to call correctly because of the numerous false breakouts that have taken place in the last 18 months-or-so. Monday's action resulted in another, so the real question is whether this, too, will end in tears for the bulls? It's an important question, since a successful resolution of the recent trading range would likely have huge technical implications, not only for the gold market but, through intermarket relationships, other markets as well.

I'll start with the current breakout and its predecessors, then point out the longer-term implications for gold, stocks and commodities.

Two Charts with Multiple False Breakouts

Chart 1 features the gold price since the correction/mini-bear market began in August of 2020. The numbers 1-3 refer to three legitimate trendline breaks that have taken place since then. All turned out to be false bullish flags. Now we can draw another and wait to see whether it will be the first legitimate break since the correction began.

Chart 2 looks at the same period, this time from the aspect of price pattern completions. All three previous breakouts failed. Interestingly, the current breakout has been preceded by a slow exponential-type build up, which is suggestive of a possible large pending up move.

Chart 3 shows the latest breakout using a daily close together with three KSTs. It's true that the long-term series is below its MA, which is not a positive. However, the short- and intermediate-term series are both rising and could certainly provide some momentum for a successful breakout.

Gold Shares

I also like to look at gold shares, as they closely correlate with movements in the metal. Chart 4 is encouraging on that front because the VanEck Vectors Gold Mining ETF (GDX) has also broken out on both an absolute and relative basis. The short-term KST and the KST for relative action show promise as well.

The Gold Bugs Gold Share Index ($HUI) consists of companies that do not hedge their gold production. It is therefore a more leveraged way to play the gold market than either the hedged share indexes or gold itself. Chart 5 shows that, when the ratio between the $HUI and the GLD is in a rising mode, this indicates growing confidence in gold-related assets. It is also associated with a rising gold price in its own right. We can't yet say that the ratio has broken out because it is right at its resistance trendline. However, the Special K has violated its down trendline, which is often a precursor to the ratio itself moving higher. You can read about the Special K here.

One way to obtain exposure with slightly reduced risk is through gold streaming companies, which you can read about here. In full disclosure, Pring Turner clients have positions in these equities.

Long-Term Implications of a Valid Breakout

If this week's breakout is successful, Chart 6 tells us that gold has the potential to trigger a major bull market signal. That's because the CPI-adjusted price is within striking distance of crossing its 1980-2022 resistance trendline. Currently, it is above its 12-quarter MA. The Coppock Curve in the lower window is also trading above its MA, all of which suggests that any move higher will be supported by a positive secular up trend.

One of my favorite primary trend models is also bullish. It is simply a monthly PPO using the 6/15 parameters. The green shading in Chart 7 shows periods when the 6-month EMA traded above its 15-month counterpart. The red and green arrows reflect the fact that very few whipsaws have been triggered since 1978. In other words, its signals are usually pretty accurate in both directions.

Late last year, it looked as though the violation of the 2014-2021 red up trendline would result in a negative zero crossover. That did not happen, though, as the indicator has been slowly advancing since. That said, the indicator is still dangerously close to its equilibrium line; all the more reason why this week's gold breakout needs to hold.

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.