Background
An exciting major event is about to occur in the precious metals arena this very week and you will no doubt see many references to it and that is formation of Golden Cross. Gold bugs including me will be looking for this event to become the ignition for gold to rally to much higher ground.
We will commence with a definition of a Golden Cross as defined by Stockcharts.com: A signal where the shorter moving average moves above the longer moving average. Usually, this term is associated with the 50-day moving average crossing above the 200-day moving average.
There is also an opposite and negative event known as the Cross of Death; this is when the shorter moving average moves below the longer moving average, for example, the 50dma crossing below the 200dma.
The Golden Cross
As we can see on the above chart a golden cross is about to be formed this week. However, before we bet the ranch on gold prices making a moon shot we might want to take a look at what happened when this cross appeared previously on the gold chart. It took place around September 2013 and as we can see things turned to custard with gold prices peaking and then falling from $1650/oz to $1200/oz in June 2014.
This week’s Golden Cross is occurring at a much lower level and should be very positive for gold, but don’t count on it. The RSI has left the overbought zone and is heading south. The MACD has formed a negative crossover and is now also heading south. It should also be observed that gold prices managed to form a new ‘higher high’ recently but was unable to hold it for more than a few days, which is disappointing as it suggests weakness.
The Precious Metals Mining Stocks
If you take a quick look at the Gold Bugs Index, the HUI you can see that it more or less followed gold. In 2013 the HUI was standing at around the 500 level, it went on to fall to around the 200 level, slashing more than 50% off the value of the gold mining stocks, a gut wrenching experience for those who were heavily invested in this sector.
Conclusion
Technical analysis is not a perfect science and as investors we should not rely on any one indicator on which to predicate our trading strategy. Even when we have a situation where a number of technical indicators appear to be lining up with each other is it very important to have a good grip on the big picture and a good understanding of the fundamentals. The fallout from the Ukraine, Janet Yellen’s tapering programme, the continuing purchases by the Chinese, to mention just a few, are all playing key roles in gold’s progress.
The gold market was a profitable sector to be invested in for over a decade or so, but the last two years this has not been the case, so great care and patience is now the order of the day. We are hunting for what we think are bargains in the mining sector in anticipation that the bottom may not be in yet and a final capitulation may still lie ahead of us. To that end we are largely in cash, but are buyers when we think that a stock has been sold off too aggressively and therefore offer us great value. Although I am not a big fan of the US Dollar it has to be noted that it did outperform gold, silver and the miners in 2013 by a long way
We will keep most of our gun powder dry and wait until we are absolutely certain that this bear phase is over before adopting a more aggressive stance on the acquisition trail. We are weary of this bear phase and we will trade accordingly until this bear goes into hibernation.
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