You may be, in fact probably are, a gold bug if you are reading this. Well, I am not a gold bug, but I have followed gold closely from a technical trading perspective for many years. I respect your faith in it. I would never short it, nor would I short mining stocks, even though the charts may look like good shorts from time to time.
I’d rather play the metal and the miners strictly from the long side, looking for the best times to enter and sometimes, to take profits. It’s not always easy. Gold’s trends are sometimes inscrutable. Those who manipulate the price of the metal do not have market based motivation for doing so. It’s always tricky.
That said, I’m here to give you an unbiased technical perspective on where the metal may be headed both over the intermediate term and longer term. This perspective is based on my 47 years of studying cyclical analysis.
And, if I’m not mistaken, there could be a gold upturn in the near future…
Over my years of study, I have developed a number of timing indicators based on the cycle theory of JM Hurst that can help us in our quest to figure out when to buy gold, when to sell it, and at times, when to convert it to cash. Because sometimes, cash really is king.
Is this one of those times? Gold performed terribly from 2011 to 2015. That was a true cyclical bear market. Over the past 2 years, its performance has been lackluster. It has lagged the gains in stocks by a margin that must be considered a kind of cosmic joke.
Since the gold bear market low at the end of 2015 gold has risen 20%.
Stocks have risen 44% over the same period. 44%! That’s more than twice the increase in the S&P 500 earnings per share. The world’s central banks sure have done their jobs.
Nevertheless, that 20% gain in the price of gold meets the CNBC/Wall Street Journal bogus standard for an “official” bull market. Never mind that there’s no “official” body that determines bull and bear markets. They said it, therefore it must be so, Virginia. Normally when a market moves up, the gaggle of media hacks shouts it from the mountaintops.
But when it comes to gold?
Admittedly, I haven’t watched CNBC in 14 years, and I’ll read something in the WSJ only when the boss tells me to, so maybe I missed something. I read the data, not misinformation about that data. However, I do monitor a twitter feed full of financial news sources, and I have seen nary a whisper of a gold bull market.
It’s all semantics anyway. Who cares what you call it? Is the price rising or not? The answer, for gold, is “yes and no.”
Long-Term Charts Show Me A Strong Base for a Potential Breakout in Gold
Let’s look at a long term chart from the secular trend low in 2001. Gold was apparently in a secular trend bull market from then until 2013.
Then in 2014 the price broke a trendline extending from a low late in 2001 and a low in 2005. Was that the end of the secular gold bull?
Perhaps not. A second trendline projected from 2 lows in 2001 was touched at the 2015 cyclical bear market bottom. The decline stopped right there at that trendline! Gold then rallied to a new intermediate high in mid 2016. Then it pulled back and again stopped almost exactly on that trendline at the end of 2016.
This secular trendline still hasn’t been broken as of mid November.
Here’s where it gets ambiguous. In 2016, gold rallied to a new intermediate high above the late 2014 high. A higher high is step one in indicating a new bull market. A higher low and then another higher high needs to follow that to form a bull market pattern.
We got the higher low in July. Both the late 2016 low and the July 2017 low stopped right at that long term trendline where the cyclical bear market bottomed in 2015. But so far, there has been no higher high to confirm that the major trend is up. So we can’t be sure that this is really a cyclical bull market. Gold needs to clear the mid 2016 high of 1375 to confirm that this is a cyclical bull market. The most we can say at this point is that it is at least flat.
The trendline connecting the late 2001 and 2015 lows is the clear line of demarcation between continuation of a secular bull market, or a sign that it has ended. That line is in the 1250-60 area this month. A monthly close below that would confirm that the secular bull market ended at the 2011 high.
On the other hand, a strong rally from around this level that closes above 1375 at the end of any month would be a clear sign that the secular uptrend remains in force, joined by a cyclical bull market. Such a synchronized pattern would be powerfully bullish.
A breakout through 1375 would suggest that a new 4 year cycle upleg was under way. The momentum indicator at the bottom of the chart clearly shows 4 year cycle lows in 2001, 2005, 2009, and 2013. Can you guess when the next momentum low was due? That’s right! This year.
It’s very interesting that momentum has never turned down since that 2013 low. This could be a tell. A pop in this indicator would be coming from 3 years of rising momentum. That would be a very strong base for a real breakout in gold. If it coincided with a price breakout above 1375, I would dig in for a ride much higher. Once through 1400, gold should face little resistance below 1750.
But beware, if the price of gold breaks that long term trendline from 2001, and momentum also turns down, we would probably be in for a very rough ride in the short run. The target could be the 2015 low around 1050 or worse. Such a washout could set up a good bottom, but let’s not cross that bridge unless and until we come to it. It would be precluded by an upturn from here.
To fine tune timing I turn to proprietary weekly and daily basis cycle charts that I developed for my weekly gold and precious metals mining stocks update in the Wall Street Examiner Pro Trader.
My Short-Term Charts Zero In on the Exact Timing for the Uptrend
Short term timing is unusually tricky with gold and the miners. For our purposes here we need only drill down to a weekly chart to see if that can give us an edge.
The price chart illustrates the concept of nested waves. This was part of the market cycle theory developed by aeronautical engineer JM Hurst in 1970, based on his multi year mathematical analysis of cyclical patterns in stock price charts. That analysis would take just a few minutes on today’s personal computers. Hurst did his work on an IBM mainframe and it took him several years.
The essence of what he discovered is that shorter term cycle waves fit successively within the next longer term wave, which in turn fits within an even longer wave, all the way up to what Hurst referred to as the fundamental trend.
The chart below shows a very long term cycle wave in dark blue. The next smaller wave is a theoretical 3 year cycle wave in teal, and then a theoretical 18 month cycle wave in brown. In addition there are shorter cycle lines in red and blue representing a theoretical 6 month cycle and one year cycle.
For gold trading purposes I’m most interested in intermediate swings that would correspond with cycles of 6 months to a year, represented by those blue and red lines.
That’s where we fine tune the timing. When gold’s price crosses above either of these lines at a point in time approximating 6 months or 12 months from the last low, we can be confident that a new up phase has begun for that cycle.
In practice, cycle lengths obviously vary. But identifying nominal cycles and using technical indicators tuned to those time frames can help us to identify turning points with greater confidence. When prices strengthen within the expected time windows, that gives us greater confidence to act.
So I also include momentum indicators and cycle oscillators designed to correspond with each theoretical cycle period.
While the charts are busy, they are packed with real visual information based on hard data. So it pays to study them! After a while, reading them becomes second nature.
Right now, the first thing that we notice on the weekly chart is that gold is in a weak long term uptrend since the 2015 bottom. But the 4 year cycle wave is only moving sideways. Gold has been rangebound for nearly 2 years. I believe that this flat period has constituted the down phase of this cycle since mid 2016.
The risk is that my interpretation is wrong, and the down phase hasn’t really begun yet. 4 year cycle momentum has just turned down. The 18 month cycle oscillator could be making a lower high here. So while I’d like to be bullish, these signs tell us that there’s a need for caution here. It’s not yet time to load up.
But here’s the key.
There has been a clear pattern of gold bottoming a one year cycle late in the year. If gold holds above 1250 over the next few weeks, then breaks through 1300, this could signal not only a new one year cycle up phase, but something much bigger. It could mean that gold is turning up for a new 4 year cycle from a very solid base within a secular uptrend.
This would be very bullish indeed. It would be time for gold bugs to buy gold again for the next big upleg.
If you’re interested in gold, you can follow and trade the developments as they happen with me in the Wall Street Examiner Pro Trader Precious Metals Reports.
The LAMPP Tells Us Cash is King Right Now
The Short Term LAMPP remains on the sell signal that was first generated in September. That looked like a bad signal, but as we noted last week, short sale trades have worked just as well as longs since that signal. The market averages have been rising on narrowing breadth and momentum. The market is far less healthy than the market averages make it appear. That’s ample reason for continued caution.
The Long Term LAMPP continues to sit on the razor’s edge, just a hair above its 78 week moving average. I have expected it to sink below that line at any time. That would be a clear red signal. As the Treasury increases new issuance and the Fed pulls cash from the system, that signal is inevitable, and it could come at any time. We are on a week to week watch.
Even though it might still be technically green, by remaining in our long positions, we’re now picking up nickels in front of a steamroller. And we certainly should not be buying new positions or adding to old ones. I would continue to liquidate a portion of my portfolio to raise a significant cash cushion over the next 3-5 months. I’m using 60% cash as a personal example. The appropriate percentage would vary based on an individual’s personal financial situation.
As for shorting, I would rely on technical analysis to add short positions in the SPY on any rallies. Such positions should start to pay off next year. However, I would be extremely cautious about using leverage, buying leveraged inverse ETFs, or buying put options until the market has clearly and decisively broken its uptrend. Such trades require near pinpoint timing to be consistently profitable. You can follow my technical work and trading suggestions in the Wall Street Examiner Pro Trader Market Updates.