Don’t Buy Gold Below the 300-Day Moving Average

Charter Trust Company

By Mark Ungewitter

August 29, 2013

Though gold bullion appears to have made a cyclical bottom, its long-term trend remains highly damaged.  From a behavioral perspective, the price of gold must surpass its 300-day moving average (currently near $1560) to prove that a secular bull market remains intact.  Long-term investors should recognize that the breakdown of April 2013 raised serious questions that have yet to be resolved.

The chart below compares the bull market of the 1970’s with the modern version beginning in 2001.  In the 1970’s, market trend was well defined by the 200-day moving average.  Through this lens, gold had two major rallies. The first ran from 1970 to 1974 and the second from 1976 to 1980.  After breaking its 200-day average for the second time, gold entered a multi-decade bear market.

The modern bull market has behaved in similar fashion, with the 300-day average playing the pivotal role.  The April 2013 breakdown represents the second breach after a decade-long ascent.  This is a very unhealthy condition in an aged bull market.

There is, of course, nothing magic about moving averages.  They are simply lagged indicators of market trend which help eliminate the noise created by short-term fluctuations.  To be of value, a moving average should: 1) have worked in the past; and 2) be familiar to market participants.  The 300-day average fails the second criteria but has, nonetheless, worked very well since 2001.

The health of a long-term trend may also be evaluated by examining the sequence of highs and lows in market price.  In April 2013, gold moved “the wrong way” out of a 20-month consolidation, posting a lower low of cyclical proportion.  This was the first such event since the bull market began in 2001, constituting a very serious misbehavior.

The “crash” of 2013 does not guaranty that the secular bull market has ended.  But as in 1975 and 1981, the burden of proof has shifted to the bulls.  Arguments for $5,000 or even $10,000 gold may ultimately pan out, but for now the chart is damaged.  If these lofty targets are to be achieved, there is plenty of room to participate after gold has repaired its long-term trend.

Note to self… Don’t buy gold below the 300-day moving average.