How to tell if gold’s bull market is threatened

Gold has been in a bull market since 2001, which was about when the UK Prime Minister, then Chancellor, sold huge amounts of our gold reserves at around $275/oz – an investment error of such magnitude that it has since been named “Brown’s Bottom”. The market’s action since has ceaselessly smacked it, an experience sadly for him, that seems to have no end, now that he’s such an unpopular Prime Minister.

As long term investors, our best friend is the 5-year weekly chart. For the ongoing monitoring of both bull and bear markets – the 30-week moving average. The 30-week moving average is a price that’s calculated daily, it is the average of the previous 30-week’s prices. The 30-week moving average supports the price in bull market conditions and suppresses the price in bear market conditions. As time moves on, the 30-week moving average becomes ever more important. A long term bull market remains secure if the price remains above the 30-week moving average.

The case for the gold chart is that periodically, even though it is a bull market, the chart has violated the 30-week moving average. However, the scale of that violation has formed a predictable pattern. When that happens, the next key indicator we use is the new low formed and its relationship to the previous low. By looking at the chart for gold bullion, you can see what we mean. On each occasion that the 30-week moving average was violated, the previous low was not subsequently violated by the new low. 

These simple technical tools help us to judge, at any one time, if the bull market is threatened. This is just one of the ways we monitor investments. The ultimate trick is to stay invested in bull markets for as long as possible and not be tricked out of them by short term noise. It is vital to understand this and avoid being influenced by the noise, of which there is always too much.

When the price in a bull market gets way above the 30-week moving average, we have an “overbought” condition. Similarly, in a bear market, when the price gets way below the 30-week moving average we have an “oversold” condition. This happens repeatedly and is not a directional change – just a point at which the excitement has got a bit too high, usually as a result of short term speculation.

In the autumn of 2006, the oil price regained the 30-week moving average and headed higher – the new buy signal to reinvest in oil occurred in the summer of 2007, since then the chart has suffered no breach of the 30-week moving average and all the ascending lows have been higher than the preceding lows, although it has become overbought.

The chart, at times like this, is our map and compass. The fundamentals remain very simple. About supply; the oil majors will not invest the trillions of dollars needed to invest to find new oil fields in unfriendly territories. About demand; the International Energy Authority in their World Energy Outlook in 2006 predicted that today’s demand of 85 million barrels per day will rise, by 2030, to 116 million barrels per day. Unless these basic facts change, the outlook for the oil price has to be ever higher.

• By John Robson & Andrew Selsby at Full Circle Asset Management, as published in the threesixty Newsletter.