This is the first time I’ve seen this ‘buy’ signal for gold since 2009

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

Let me start by issuing a couple of disclaimers.

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

The moving average convergence/divergence, or MACD (pronounced ‘Mac-Dee’), is a technical signal used to measure momentum and to determine whether something is overbought or oversold. Trend-followers like to use it as a timing indicator – when to buy or sell – too.

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.

Gold price and MACD chart

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).

This article is taken from our FREE daily investment email Money Morning.

Every day, MoneyWeek's executive editor John Stepek and guest contributors explain how current economic and political developments are affecting the markets and your wealth, and give you pointers on how you can profit.

Sign up free here.

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.

MACD works 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

This chart shows the same indicator at work in gold 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.

Gold price and MACD chartIn order, then, for this current buy signal to come good, gold bulls will want to see a trending rather than a range-bound market. Nobody knows whether that will happen or not, of course.

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’.

Fingers crossed.

• Dominic Frisby is the author of Life After The State and Bitcoin: the Future of Money.

• This article is taken from our free daily investment email, Money Morning. Sign up to Money Morning here.

  • Graham Cooper

    Good article but what about gold miners? Seems as if they should have a couple of years of low oil prices to boost profits and dividends (if they are big enough to pay divis). What about the resource currencies, especially Canada and Australia?
    What about silver and PGMs?

  • Alexg123

    I can’t see it myself, real interest rates have been the driver of the gold price over the past 5/6 years and I can’t real interest rates (measured by 5 year TIPS) moving negative again until we start to get inflation. Where’s the inflation? If anything, we are looking at positive real interest rates with deflation. Bad for gold.

    • Steve3

      Gold can rise in deflation and inflation. When the crisis in confidence begins against government thats when moves will occur ( coming soon ). My view its already happening in Europe. Everyone is realising their ‘leaders’ are puppets for the ECB and the US and havent a clue of what they are doing

  • Ellen

    I’ve learned to regard gold as something that is rigged and manipulated by the Comex futures paper market and do not believe there is any point in looking at its value in any other terms but fundamentals. For instance, last Friday it lost $30 in a few minutes – which was explained by the mainstream press as ‘better than expected non payroll US numbers; – something that everyone knows is fabricated and excludes huge numbers of inconvenient unemployed people! The potential of a Greek default on the derivatives market, estimated to be some $70 trillion didn’t cause a ripple or the news that China’s exports have tumbled by nearly 20% in a year. It’s a story that makes Alice in Wonderland look realistic and should hold enough warning to ignore main street advice on the subject and have some physical gold in your possession.

    • Ted Crilly

      Quite right
      Max Keiser had a guest expert on last week saying the same
      Supply and demand means nothing when banksters (or a cabal of) are fiddling the price to where they want it twice daily
      I gather the Chinese are going to esablish their own price fix ?

  • Onlooker from Troy

    Dominic, you need to take another look at where those buy & sell signals actually occurred, pricewise.

    For instance, the buy in ’07 was at the end of Sep with gold at 750 (monthly close, of course), the sell signal in ’08 was at the end of Aug with gold just under 840 (monthly close) and the buy in ’09 was then at end of Sep with gold at 1009 (again, monthly close).

    Then the sell in ’12 was at end of Feb with gold at 1700.

    It can be deceptive when looking at the charts so you have to look closely at where the MACD went pos/neg at the month end and look at price at that time.

    As usual, this kind of strategy doesn’t look quite as good as it seems when you examine it closely.

  • okane

    Thanks Dominic for a fine set of data and research. Do you have advice for how those of us who live in a Sterling£ world can make use the figures? Surely the US$.GB£ exchange rate today, as well as the historical exchange rates at the previous Buy & Sell date are significant for those of us with a Sterling£ account?

  • Phil G

    I agree the gold price is not driven by supply and demand of physical metal, but by the supply and demand in paper contracts, which like money can be created out of thin air. It is my understanding that very little physical gold is sold via the Comex. I’m waiting for the day that someone buys all the contracts on the gold Comex market and holds for delivery. That would put the cat amongst the big banks manipulating the gold price for there own benefits. Last I heard there were effectively 70 claims for every ounce of gold on the Comex. No doubt their would be screams this is unfair and suspend the market. Of course they sellers can pay cash, which they are legally able to do instead of physical metal in the Comex market, but that would show the mockery of the gold Comex market to the rest of the world and destroy its integrity.

  • David Moore

    The price of gold has been manipulated for years.
    What does the price matter of TV’s in Walmart when you can’t take delivery? Try taking delivery of gold and silver on COMEX, it just won’t happen. They haven’t got any gold or silver.
    Brown dumped the UK’s gold to help Goldman Sachs out of a spot. Fort Knox has gold plated bars of tungsten. It’s all gone.
    A true price of the precious metals would expose the fiat currencies for what they are – worthless. The banksters had to divorce money away from gold and silver so they could print endless quantities. And they most certainly have created endless quantities on their computers in QE after QE.
    Their problem is all the gold has gone East, to China, Russia and India.
    BRICS will set up a gold backed currency.
    The USD is in a terminal stage. The US economy destroyed. T bills are being dumped, the USD returned to sender.
    It’s about done lads.
    The banksters wanted to collapse the USD and bring a rescue plan involving a new electronic currency. Line up here to be chipped.
    BRICS has done for with that idea.
    Batten down the hatches, the ride is going to be rough and make sure you have all the silver coins you can get very well hidden.

  • Great article and I do agree if Gold react to EU QE the same way to US QE then it should be a great idea to buy Gold in EUR.