This is the first time I’ve seen this ‘buy’ signal for gold since 2009
A rare long-term buy signal – only its fourth appearance in ten years – has got Dominic Frisby excited about the gold market. Here, explains what it is.
I'm excited to say that I've just had a long-term buy signal on gold.
It's the first such signal I've had since 2009.
And today, I'm going to tell you about it
This is a long-term buy signal not a sign gold will rocket within days
This signal doesn't mean gold is going to go up next week, or even next month. It is very much a long-term signal.
So forget the day-trader this is one for the dude who has better things to do than stare at daily market fluctuations on his or her screen and who only occasionally makes significant changes to his or her portfolio.
(In fact, as it happens, short-term, I actually have gold on a sell' signal.)
I should also add that this is just one technical indicator. It is not reason in itself to go out and bet the house. Before making any investment decision, you have to add up all the pros and cons, work out your risk, your time horizons and so on. What I'm about to describe to you is just one thing to add to the pros column.
That said, I like what I'm seeing.
This signal only comes once every few years
It tends to work better in a trending market in a ranging market I've found it to be less successful. I'm not going to explain how or why it works if I start talking about moving average convergence divergence' many of you will just switch off. Instead, I'm just going to show you the buy and sell signals.
In the upper half of the chart below, we see the gold price since 2005. I have marked the points at which we got sell' signals with a red arrow, and buy' signals with a green arrow.
In the bottom half of the chart, we have the MACD. I have marked the buy' signals with a green circle and the sell' signals with a red circle.
Ignore the blue bars around the zero line. I only want you to look at the red and blue lines.
When the blue line crosses up through the red line, that is your buy' signal. We saw this in late 2005, mid-2007, mid-2009 and just now where I have drawn the green circles.
When the blue line crosses down through the red line, that is your sell' signal. We had sell' signals in 2007, 2008 and in early 2012.
(The red and blue lines, by the way, are moving averages. The red line is also known as the signal' line).
As you can see, these signals do not come about very often sometimes two or three years pass before you get one.
This is only the fourth buy' signal we have had in ten years. The 2005 buy' saw gains of about 35% before the sell' arrived. The 2007 buy' saw about 20%. And the 2009 buy' was a beauty: it came when gold was under $1,000 an ounce and lasted for more than two years.
When the sell' came, gold was near $1,800. And that sell' was a beauty too it saw gold go from close to $1,800 to the $1,235 area where we sit today.
MACDworks best when the market is trending 2009 to 2012, for example, or 2012 to now. In a range-bound market, such as early 2007, when gold was pretty flat, it gets muddy.
So you want to see a well-defined break through the signal line and when a market starts trending, you get that clarity.
How the MACD worked from 1985 to 2000
You can see the buy' signal worked well in 1985, as did the sell' in 1988. But then from 1990 to 1994, sell' signals quickly followed buy' signals (where I've drawn the green and red arrows in the lower half of the chart) as the market ground slowly lower and it was all a bit muddy.
Without breaking out a spreadsheet, I think the system just about beat the market during this period but it certainly didn't buy you any yachts.
But if the trend does occur, this signal will have got you onboard for it. Using MACD crossovers will never catch the absolute bottom or the top for you but they will get you most of the move, if there is one.
What has me particularly excited about the current signal is that it is occurring so far below the zero line. The 1985 buy, for example, came at -30. This one has come at -60. That basically means the buy' signal has come off an extreme level the highest for a generation. There is a lot of room' on the upside.
From here on in, we want to be watching the price at which gold ends each month it doesn't matter so much what happens tomorrow or next week. As long as the blue line in the first chart stays above the red, gold is a buy'.
Dominic Frisby is the author of Life After The State and Bitcoin: the Future of Money.