Gold Price Suffers ‘Goldbugitis’

April 19, 2015

I don’t think medical doctors have diagnosed the condition yet, but Gold Bugs know that it exists. The affliction expresses itself as a constant desire to find bullish indications in every precious metals chart or article.

If the three minute chart of Gold ticks up a few pennies the worst of us are ready to start predicting that the yellow metal is heading to $5000 per ounce immediately. An article suggesting that Mr. T is buying a few more chains might make us think that this new demand for Gold will certainly drive the price higher.

I’ll be the first to admit that I suffer from goldbugitis. Perhaps there should be a support group: “My name is Bryan and I’m a Gold Bug. It’s been 3 days since I fondled my Gold coins…”. I do try to keep my condition in check though, and I stay away from three minute charts entirely. As a matter of fact, in today’s letter I’m only going to look at monthly and weekly charts. Even in these long-term charts the conditions are bullish enough to get me excited.

Check out this monthly chart of the HUI. Back in 2002 / 2003 price ran into resistance at the 150 level and took more than 12 months to break through. Above 150 conditions were so bullish that when price pulled back to test the breakout area, the pullback could only reach 165 before reversing higher. After testing the breakout zone twice HUI went on to triple in price (300% gain).

The financial crisis in 2008 knocked the wind out of precious metals stocks and HUI returned to the 150 level once again. After testing this long-term support level, price zoomed higher, this time increasing 400% in less than three years.

Today we find the HUI back at the 150 level after more than three years of painful declines. For those of us with goldbugitis the last three years have been uncomfortable indeed!

HUI – Gold Bugs Index - monthly

There are some really bullish aspects to this chart.

First is the fact that price has returned to the 150 support level and started waffling sideways instead of dropping further. In other words, the long-term support level is still intact and, as we have seen, this level has been the jumping-off point for rallies of 300% and 400%. Even a modest 38.2% Fibonacci retracement of the 2011 – 2015 decline would take us up to 335 and the upper median line of the Andrews pitchfork - that’s a clean double from current levels.

Second is the MACD indicator bottoming (?) in late-2013 and then issuing a buy signal in June 2014. Look at the last MACD buy signal in 2009. That signal lasted for 20+ months. We do have to acknowledge however that in 2009 MACD was in bull mode (both lines above zero) while the indicator is currently in bear mode. This puts a slight damper on my enthusiasm but MACD is rising bullishly and the buy signal is hard to ignore.

Let’s turn now to the weekly chart.

Andrews pitchforks help us identify the current trend and the red modified-Schiff fork in the chart below makes it obvious that the trend is currently down. Even so, there are several bullish signs in this chart that we want to consider.

According to Edwards and Magee in Technical Analysis of Stock Trends, “Divergence is one of the most common and effective patterns in technical analysis. Patterns where the MACD shows Divergence from what the prices are doing can be an important signal …”. The signal they are referring to is the end of the current trend and a reversal in direction. The bright red and green lines in the weekly chart are highlighting the ongoing divergence. This divergence has been in effect for over a year and, as E & M tell us, “… the pattern needs time to develop and should not be anticipated.” It would be reasonable to assume that the longer the pattern takes to develop the more significant it is – i.e., this divergence is marking the end of a three+ year downtrend and reversing direction will take some time.              

HUI – Gold Bugs Index – weekly

The next thing we want to notice in the chart is that last week price poked above the 270 period regression line (RL). Who cares, right? Well, consider the chart below and trace the 270 RL back in time.

HUI – Gold Bugs Index – weekly

This chart gives us the big picture and provides context for the chart we just looked at. Notice how the 270 RL marked support in 2011 as price was peaking and then identified resistance after the HUI started dropping. Now here we are three+ years after that peak and price is finally rising above the 270 RL. I consider that to be a significant development but, as I admitted earlier, I am afflicted with goldbugitis.

The rise above the 270 RL is also taking price through resistance at the median line of the red modified-Schiff pitchfork. Assuming that this push higher marks the start of a new uptrend, I have drawn the blue Andrews fork. This fork’s median line gives us a potential target (red ellipse) which is coincident with the upper median line of the red fork and the prior high.

I’m going to wrap things up now. My palms are getting sweaty and I think I need to go fondle my coins …

“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”   --  Warren Buffet

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Editor-in-Chief, Pitchfork Playground

The world’s gold supply increases by 2,600 tons per year versus the U.S. steel production of 11,000 tons per hour.

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