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Gold's "Death Cross"

Gold Prices Dip

Written by Briton Ryle
Posted February 22, 2013

What is going on with gold?

Gold has lost some $100 in the last week or so. And to make matters worse, it has come face to face with the dreaded ”death-cross”—when the 50-day moving average crosses below the 200-day moving average—which traders consider a bearish signal.

But there could be more to it than that. The Canadian newspaper Globe And Mail cites CIBC economists Avery Shenfeld and Emanuella Enanajor, who warn of lower prices to come.

“’Gold will have its day in the sun at other points down the road, but the clouds on the horizon could portend still lower gold prices over the next couple of years.’ … They now project gold will dip to average $1,500 (U.S.) an ounce by 2014. ‘It‘s been a glorious run,’ they say. ‘But already, many of the forces that made the yellow metal so attractive look to be turning over, and expectations for other supportive factors are overdone.’”

Those forces that made gold attractive—namely, fears of inflation and currency devaluation brought on by excessive money printing—appear not to be as worrisome as once believed. The economists simply call all such talk a “myth”.

But why now all this pessimism? Investing.com explains that Wednesday’s release of the minutes of the Federal Reserve’s January meeting “showed that policymakers discussed the slowing or stopping of USD85 billion in monthly bond purchases even before the job market improves, amid concerns that the policy could cause instability in financial markets.”

Since gold is not an income generator, such as a company stock or bond, the only appeal of gold as an investment is as a store of value relative to other instruments. So if stocks are expected to perform poorly, and interest rates are exceptionally low, money starts flowing toward gold, which offers preservation of capital while everything else is losing value in a negative real-interest rate environment (where a currency’s value does not keep up with inflation).

But by the same measure, when value shifts back into stocks and currencies, money will flow out of gold into those instruments offering the better value—be it income, dividends, or capital growth.

“Perhaps the most important reason for the weakness in gold,” supports another Investing.com article,“is that after three years … the global economic and financial outlook is improving. That means that central banks may start to ease off on easing.”

With stocks still at 5-year highs and the U.S. dollar index up from 74 in September of 2011 to 81.39 today (a rise of some 10%), it is only natural that cash would flow out of gold to take advantage of gains elsewhere.

So, then, is this it for gold? Is the bull run over?

“Hold your horses. Don’t despair.” A MoneyWeek report yesterday tempers our fears. “We haven't even got to that $1,520 area yet, let alone gone through it. There's no guarantee we will even get there. Though it’s never too early to be considering what your exit strategy might be, it's too early to be declaring game over. There are a few things we can be very positive about.”

Yes, please… something to be positive about. For some very quick bullet shots, let’s turn to Ambrose Evans-Pritchard, who has covered world politics and economics for 30 years. In his article for The Telegraph, he counters the opening bearish arguments above:

  • “All we had from the minutes was a comment that an undisclosed number of FOMC voters fear inflation and financial bubbles and think the Fed should stand ready to cut back on bond purchases earlier than thought. How many times before have we heard ‘exit talk’ from Fed hawks?”
  • “The policy is dictated by the Fed Board and by Ben Bernanke, and there is little sign yet that the board is about to turn.”
  • “The US faces fiscal tightening equal to 2% of GDP this year at best. … There is a snowball’s chance in hell that economic expansion will be strong enough in 2013 to force Fed tightening.”
  • “Japan … has imposed a new policy mandate on the BoJ that implies massive easing over the next year.”
  • “The world economy as a whole is still in the grip of a deflationary vice.”
  • “The overhang of excess capacity in global manufacturing is still there.”
  • “We remain in a 1930s slump. Until this is overcome it is a fair bet that … central banks and their OECD allies … will stay uber-loose to mitigate the damage.”
  • “The world’s … central banks bought more gold last year than at any time since 1964. Turkey, Russia, Brazil, Korea, the Philippines, Kazakhstan, Iraq, Mexico, Paraguay, and others all added to their gold reserves.”
  • “The Chinese don’t declare gold purchases, but it is an open secret that [they] are buying on every dip, as they have to do merely to keep the proportion stable at 2% of their $3.3 trillion reserves.”

“So hold your nerve,” Pritchard concludes. “The reality is that we have been moving for several years to an informal Gold Standard in which gold takes its place once again as a central store of value – a currency of sorts – in the mix of sovereign reserves. The reason is obvious. The West is crippled by debt, and so is Japan. Governments are likely to seek an easy way out in the end. The rising reserve powers of Asia know this perfectly well.”

So given the fundamental picture still looks great for gold going forward, could all of this recent commotion be just about the technicals? I—as one among many—would have to say yes, it is about the technicals. Let me show you what I mean.

If we look at gold’s recent run from when it really took off back in 2005, we can see that what gold is going through at present is actually quite normal.

In a previous article for Wealth Daily, I pointed to a 21-22 month peak-to-peak cycle that gold has been faithful to four times since 2005—namely May 2006, March 2008, December 2009, and recently September 2011 (circled in red below).

Gold Price Peaks ChartSource: BigCharts.com

In each case, gold fell off the peak into a correction, which lasted for some time. Do you notice how long gold took to regain each peak and finally break through? It took some 18, 19 and 10 months, respectively (blue lines). We are now some 18 months into this present correction. Nothing too unusual here.

What is deceiving about base-building is that we will see the entire cone of the last spike completely wiped-out before resuming the upward trend, as shown below.

Gold Spike ChartSource: BigCharts.com

Notice how in each of the four peaks, the entire cone of the spike (yellow) was completely wiped out in a matter of just two or three months. The gold price returned right back to where each spike first began (green).

Gold then consolidated like a ball bouncing on the floor until it finally settled. But do you notice where it settled? On the green line, the same price-level where the spike began.

This is extremely common during bull runs—and during bear runs too, though in reserve. In a bull run, price levels that cause major resistance going up (left end of green) also serve as major supports coming down (the remainder of green). What once was the ceiling now becomes the floor.

And that is where gold is today, caught by its safety net at the $1550 area, or $150 GLD.

But do you notice those little black tips breaking through below the green support lines? Most noticeable near the end of 2008, gold did briefly break through its support line in each of the three prior corrections. Yet it quickly returned back to the green support.

So if gold breaks through the current $1550 support line, how far can it go? We need only look to the next level of support below the green lines, shown below in red.

Gold Support ChartSource: BigCharts.com

When gold broke through its major support line (green) back in 2008, it was caught by the next safety net beneath it (red), at around $730 an ounce, or some $70 GLD.

Why did it stop there? Because that was about the same mark as the second previous ceiling, at the left end of the red line. Again the rule holds true… what once was the ceiling now becomes the floor.

So even if gold does fall below its current $1550 area, it would be caught by the next safety net below it at around the low $1400’s, or $140 GLD.

In percentage terms, this drop to $1400 would still be not unusual. The 2006 correction dropped some 19% off its peak, 2008 plunged around 30% off its high, while 2009 fell about 17% from its top.

This time around, the current $1550 from $1925 represents only some 19% so far, which again is not out of the ordinary. Even if gold were to match the 2008 slide of 30% down to $1347, the upward trajectory would still be intact.

But we have to ask Ambrose—what about that “Death Cross”? You have to admit, it really sounds terrible.

“As for the Death’s Cross,” he addresses, “when the 50-day moving average falls below the 200-day average – it has not actually happened. It occurs only if the 200-day line is declining. This is not yet the case. … The line is rising very slightly. That makes it a ‘Dark Cross’.”

Well, at least it doesn’t sound as bad.

Joseph Cafariello

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