Dear Bottarelli Research Reader,
It’s the biggest question looming in the background…
As everyone discusses whether or not the Fed will taper off its flood of liquidity or continue pumping out billions of newly imagined dollar, everyone wants to know if the bottom has been set in gold.
As you surely know, gold’s theorem is straightforward:
“Gold’s inherent value never changes. So when a government creates too much currency, the value of that currency falls, and the price of gold as measured in that currency, goes up.”
For decades past, that meant that gold sat in the background in good times, but became a safe haven in troubled times – like when governments were trying to print their way out debt.
But then, we entered the era of “permanent” printing, wherein the central bank creates money in bad times to restart the economy and creates more money in a rising economy for fear of ending the good times.
In this phase, gold became just another bubbling asset. Major trading houses bought gold in lockstep with stock and commodity assets.
But now we’re seeing the odd results of several permanent printing cycles, and gold has lost its place in the larger cycles. It’s no longer rising with stocks.
Nor do investors appear to have much interest in gold as a hedge against inflation, when there is little obvious inflation on the near horizon (as illustrated below).
Add it up, and gold has been lost in the woods for months now, twitching this and that, looking for some part of a cyclic trend to hook onto.
So we ask again, “Does gold’s latest uptick mean that it’s latching onto a new rising trend?”
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Gold’s Hot Chart
Here’s our version of the chart that has the gold bulls so excited…
We’re using the Gold SPDR (GLD – NYSE) as a proxy for physical gold, but the same action shows up in the Philadelphia Gold and Silver Sector Index (XAU – NASDAQ) and gold futures charts.
The daily action shows what appears to be a knife point bottom, followed by a sharp 8.7% rally that breaks up through the old falling trend.
On the lower oscillators, MACD shows an ostensible Buyers Cross and Accumulation/Distribution shows a sharp break to the upside.
One can easily understand why this chart has the gold bugs so excited.
Why, if you annualize this, you could pocket 226% gains over the next year and more than 2,000% over the next decade!
“Not only could this happen,” they argue, “it should happen! It is philosophically correct!”
But…will it happen?
The Fed Feeds Our Bad Habits
We have to tell you that we have no objection to philosophy, as far as it goes. Specifically, gold fans are completely correct in their assessment of the central bank’s bad habits.
In the long run, the Fed may very well have ruined our country, because they induce investors to buy shares of companies that have no hope of ever making a profit.
This may be great for stock prices in the short term but it completely bypasses the market’s natural Darwinist tendency to reward good ideas and punish bad ones.
But, that philosophy won’t tell us what the hell is going with gold right now.
Fortunately, technical analysis can – if it’s done properly.
The Right Gold Chart
Here’s our group’s working chart for the GLD – or at least the actionable portion of it, anyway. We actually start with a much larger five-year chart, marked off in weekly candles. This allows us to view the vast sweeps of price that build into genuine trends.
Down there in its lower right hand corner, you can see the one-month chart that the giddy gold bulls are passing around.
In this context, you can easily tell that the bull’s bottom is just the latest in a series of “Bull Traps” within gold’s accelerating downward curve.
Slide your eye back to the top left of the chart, and you can also see the clear, well-structured technical sell signal that marked the beginning of gold’s failure.
Back in November just as stocks began to rally, gold broke the bottom line of its long rising trend. This broad shift was confirmed by a Sellers Cross on the Moving Average Convergence/Divergence (MACD) oscillator, and a marked shift to long-term share distribution on the Accumulation/Distribution oscillator.
By February, gold was confirming these initial signals by showing a Death Cross, wherein the upper chart’s 50-day (10-week) moving average crossed below its 200-day (40-week) average. This is universally accepted as a long-term bearish indicator.
Gold’s Good and Bad News
So…the bad news is as of yet, there is no reason to believe that this is the bottom for gold.
We’re not quite willing to go so far as Duke University’s Campbell Harvey, who declared this week that the price of gold could fall below $800 an ounce over a long-term horizon.
We have to admit, Harvey has us beat when it comes to taking a long view. Harvey notes that over 2,500 years of history, the real price of gold (the nominal price adjusted for inflation) has remained roughly the same: “Right now we’re way above the mean. If you look historically, it doesn’t just go down to the average and stay there. It actually goes through and falls below, then comes back up.”
Now that’s long-term math! For now, we’re satisfied that the GLD will see $113 again long before it sees $127.
Having said that, we would like to point out there is some good news in this chart for gold fans.
And that’s the fact that gold is not as unique as they might like to believe. Rather, it’s just as chartable as any other asset or asset class.
That means we’ll eventually see the book-end buy signals to gold’s sell signals. Weekly price will break the falling trend (not daily price). We will see a MACD Buyers Cross. And the long A/D slope will reverse, indicating sustained accumulation.
And, all of this will be confirmed by a moving average “Golden Cross” on the upper chart.
Those will be the signs of gold’s real bottom.
In the meanwhile, stand clear. Because until then, gold is just another rock — and big falling rocks can really bruise a fellow.
As always, the charts tell all.
Sincerely,
Adam Lass
Bottarelli Research Newsletter
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