Even a blind squirrel occasionally finds an acorn. And so it is that after several years of calling gold’s bull market dead and done, gold-bashing analysts may finally be getting it right. Year-to-date the precious metal has been getting hammered, losing 49.5% as measured by the Morningstar Equity Precious Metals Index which makes gold the single worst performing investment group. Through yesterday’s market close popular funds such as USAA Precious Metals and Minerals (USAGX), American Century Global Gold (BGEIX), Fidelity Select Gold (FSAGX) and Gabelli Gold (GLDAX) have seen their share prices sliced in half with losses of 52%.
Taking a look at the three-year chart of daily gold prices at the top of this blog post you can see where the first sign of trouble surfaced in late-2011 when the price of bullion dipped below its longer-term 200-day average. On the same chart note the second red flag this past spring when the yellow metal’s price breached multi-year support (bold blue horizontal line). Now glance at the 13-year chart of weekly gold prices below. The yellow metal’s 50-week average has now fallen below its 200-week average – a technical pattern called a “Death Cross” because it typically ushers in lower prices. Back in 2002, you can see how the 200-week average’s move above the 50-week average heralded in 12 bullish years.
I heard an analyst on CNBC this afternoon describe the current gold scenario as a cyclical bear market in a secular bull market. Yes, it’s possible for gold to be in both a bear market and bull market at the same time. It’s because all markets move in both shorter-term and longer-term cycles. Shorter-term cycles are referred to as cyclical and usually last 2-3 years, while longer-term, secular markets typically last between 10 to 20 years.
With dramatic developments in the gold market over the last 12 months, it’s easy to forget why an allocation to the yellow metal can make sense in your portfolio. Historically gold bullion has served as a hedge during economic uncertainty. For example, during the 2007-2009 bear market in US stocks when the S&P 500 fell 56.8% from peak to trough, SPDR Gold Shares (GLD) – my investment vehicle of choice for managed account clients, rose 23.9%. As with all my positions, I manage risk with an intermediate-trend based timing strategy. Currently my Gold Trading Model is on a sell signal.
♦ Please note that my readings will change without notice, so please don’t buy or sell solely based on anything you read in this blog. ♦