After the big gains of the last few years, gold is consolidating. But the long-term outlook is unchanged. So should you be buying gold now? Dominic Frisby investigates.
In fact, if you have been looking for an opportunity to increase your exposure to gold, now could be the chance you've been waiting for
Gold is consolidating after its 2011 excesses
My longer-term prognosis for gold remains unchanged.
When gold has one of its big run ups, as it did in the periods to May 2006 and February 2008, afterwards, it goes through a lengthy period of consolidation. It's trying, it's frustrating, but that's what it does.
Eventually it gathers impetus again, challenges the old high and, after several attempts, breaks out. The old high then becomes support. But it is many months sometimes more than 12 before we challenge that old high.
Gold is now in consolidation mode after its 2011 excesses. It will be many months yet before we break out to new highs. But we will. And two or three years after we do, gold will have another big run-up and sell-off and that $1,920 figure will be the line of support just as both the $700 and $1,000 have been.
We still have colossal monetary stress, unpayable national debts, negative real interest rates and central banks that - despite yesterday's jawboning by Federal Reserve chief Ben Bernanke - have gone beyond the point of no return on the money-printing path.
He is not printing at the moment because he doesn't have to. US stock markets have been the stellar markets. They won't be forever.
In the meantime, I'd like to introduce you to another moving average, one that's worked particularly well for gold over the years. You may remember how well my 144-day moving average worked in the period from 2009 to late 2011. Well, now I'd like to tell you about the 252-day moving average.
When gold hits this line, it's usually a good time to buy
I use the 252-day moving average because there are usually 252 trading days in year, so, in effect, it shows the average price over the last year. (My thanks go to author and trader Michael Hampton for alerting me to this).
Here we see gold from 2001, when the bull market began, to 2008. The red line underneath is the 252-day moving average.
You can see that throughout that seven-year period, gold repeatedly came back to it and found support there. In other words, it consistently marked an excellent entry point.
These things don't work forever, however, and in 2008, as the world panicked (did you panic first?), gold got too far above the moving average, and then for a few sorry months in the latter part of the year, the price plunged through it.
From 2009 it hardly worked at all. Why? Because it didn't have to.
From spring 2009 to late 2011 gold, such was its strength, never went back to its one-year average. Instead it consistently found support at the 144-day moving average - the green line on the chart below. The irrelevant' 252-day moving average is in red.
But in September last year, as we all know, gold went too far too fast.
One casualty of the subsequent wash-out has been the 144-day moving average (we are currently sitting below it). It is, for the time being, no longer an effective tool.
But, joy of joys, our friend the 252-day moving average has risen from the ashes. It now seems to be offering gold the support it so badly needs. Here's a one-year chart of gold with the 252-day moving average underneath. We've just slipped through it overnight.
The 252-day moving average, I've found, is more of a rough guide'. It doesn't nail the exact lows in the way that the 144 did. You can see we slipped through for a few days in late December. But, over a longer time frame, it's acted as a good point to be dripping money back in.
Will it continue to work? My bet is that it will.
I said a few weeks back that gold looks like it wants to go back to $1,600. I thought we had seen the low last week and that we were on our way back to $1,800. It looks like I got that wrong and that $1,600 has to be visited first. We'll see.
I'm not sure, as some suggest, that Bernanke is out to deliberately suppress the price of gold. But he has said before that he has the gold price on his screen and watches it every day.
Does he want the gold price to soar? Of course not. But read his work, look at the measures of inflation he uses, look at what he actually does - he is a keen proponent of monetary stimulus. As Marc Faber would say: "he's a money printer".
Gold has gone back to its one-year moving average. Every time it's done this bar a few months in late 2008, it's not been a reason to panic. It's been an opportunity.
So my message to you today, in case you haven't already got it, is sit tight, stay long, stay strong, and be patient. The bull market isn't over.
This article is taken from the free investment email Money Morning. Sign up to Money Morning here .
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