Gold has had a good year.
From its New Year’s Eve low of $1,181 per ounce, to its close yesterday of $1,290, it has risen by more than $100 – about 9%.
I’m staring at the gold price and wondering, “Is the bear market over?”
Gold isn’t in a new bull market yet – not by a long chalk
The ‘official’ definition of a bear market is a market that has fallen 20% from its highs. So the ‘official’ definition of a bull market must be a market that has risen 20% from its lows.
So, ‘officially’ the answer to that question is: “No, the gold bear market isn’t over”.
Assuming we don’t break below last year’s lows of $1,180, then a new bull market won’t be confirmed until we breach the 20% mark at $1,416.
I must confess to being cautiously optimistic, however.
I like the way that gold has reacted to the deflationary pressures of a falling stock market. Money appears to have rolled out of stocks and into gold. This might just be a re-balancing act following an over-bought stock market and an over-sold gold market. That said, it is positive action.
I like the way gold is sitting above its 21- and 55-day moving averages, with the former now sloping up and the latter flattening out. That’s indicative of a new, rising trend forming, which is also positive.
And I like the way gold reacted to Janet Yellen’s first remarks as head of the Federal Reserve, which indicated that she’s going to continue where her predecessor Ben Bernanke left off. Gold rose over 1% on the day.
A number of bears have pointed out that silver, which tends to lead gold, has only equalled gold’s gains of 9% since 31 December. As silver is ‘higher-beta’ (City speak for ‘more volatile’), you would expect to see higher gains.
But I don’t agree with this view of silver. As far as I can see, silver tends to outperform gold later in the cycle. In the early stages of a bull market, you tend to see strength in gold first. The money then rolls into silver as people become more confident.
For example, from 2001 to late 2003, as gold made its way from $250 to $400, silver struggled to get above $5 an ounce. Silver only made its 2001 bear market low in November, some six months after gold had started creeping up from its low the previous April. Gold was also faster out of the blocks following the crash of 2008.
So I don’t think there’s too much to worry about there.
I’m also encouraged by the action of the large gold producers. These have risen some 20% from their New Year’s Eve lows. This is a marked outperformance and the kind of action you like to see in producers. It suggests an expectation of higher gold prices.
Then again, they were so oversold, some kind of bounce had to come. This could be nothing more than a bounce of the dead cat variety.
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The bear case
The Atlas Pulse newsletter published the following table in its February newsletter, which I post below.
It’s worth considering. The writer identifies various targets that have reached major bear market lows. A lot of them are technical – don’t worry if you don’t understand them all – Atlas’s point is that these targets have not been met and so the bear market still has further to go.
|Gold silver ratio||64||80+||Long term||Reached 80 in 2008 and 100 in 2003|
|Monthly RSI||39||< 30||Long term||A bear-end should see price structurally oversold|
|Gold lease rates||0.10%||3%||Medium term||Hit 3%-plus in the 1990s at the lows|
|COT longs||18.2MOZ||< 5 MOZ||Medium term||This occurred in 1999 and 2001|
|ETF holdings||55.9MOZ||< 50 MOZ||Medium term||This would flush out the post-2009 renters|
|GVZ – the gold Vix||18.7||> 35||Medium term||This is twice the average historic volatility|
|Internet interest||low||very low||Medium term||Investors have lost interest and no longer visit gold websites|
|Shanghai premium||$5||$40||Short term||A premium encourages Chinese demand|
|COT shorts||13.6MOZ||> 18 MOZ||Short term||June 2013 saw massive shorts. Quite high today|
|Option volatility||-2%||< -5%||Short term||-6% in June 2013|
|MOZ means million ounces|
I don’t have space here to analyse each line in turn. But what I will say is that Atlas has identified points of maximum pessimism. These levels have been reached in previous bear markets. But that doesn’t necessarily mean they have to be reached in this one.
During our exchange of emails, Atlas was adamant that the developing crisis in the emerging markets is bad for gold. We’ll see if he’s right.
What does the 144-day moving average say?
I find it very hard to write an article on gold without coming back to my favourite indicator of all – the 144-day simple moving average (144dma).
For the uninitiated, the 144dma shows the average price of gold over the previous 144 days. Why this should work, I have no idea, but I discovered that in the run up from 2008 to 2011, gold would consistently come back to this moving average before embarking on its next rally.
It stopped working for a while, then, after falling below this average, it began to do the opposite. Through its bear market it repeatedly rallied up to this average, which then marked an excellent point for a short.
Here we see gold from 2007. The price of gold is in black and the average is in red.
Back in early November I wrote about how I shorted gold based on this simple average. The chart below shows that we’re at that line again right now – again the gold price is in black and the 144dma in red.
As far as I’m concerned gold remains in a bear market until it gets above that average and stays above it.
But the average is now flat, rather than sloping down, which indicates a trend that has slowed. In this case, it’s a bear-market trend that has slowed. Gold touched that line yesterday, but failed to make it through.
All in all, the obvious trade here is to short gold with a tight stop just above the red line, perhaps just above the round number that is $1,300. I’m not sure gold is a screaming short. But over the next month or two I favour that side of the trade.
The seasonal argument also favours this trade. You tend to see highs in mid- to late-February, declines into March, then a strong April and May, before another low in June and July. Seasonal patterns do not always play out, of course.
I can see us following that pattern: giving back some of the January gains, followed by a rally, then another decline, so that six months from now the price has hardly changed. But, technically, a stronger base will have been built on which the next bull market can be built.
As ever, I reserve the right to change my mind as events unfold. And, by way of my physical holdings, I am still very much net-long. I’ll be happy to be proved wrong, get stopped out of my short, and see gold go on creeping higher. I’ll be less happy if Mr Atlas Pulse gets it right and we head back to the $1,180 lows or, worse yet, $1,050.
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