After what seems like a decade in the shadow of tech stocks and cryptocurrencies, gold and silver are rocking again. Which of course leaves everyone wondering if this is the beginning of the long-awaited epic run, or just a head fake preceding yet another grinding, protracted, soul-sucking decline.
The following chart has a couple of technical indicators that, if history still matters, shed some light on the challenges gold now faces. The first is the 50-day moving average, shown here as the thin line that tracks the more colorful price line. Note how when gold’s price spikes above the moving average, it is, in technical terms, “overbought.” In other words, it’s ahead of itself and has to fall to get back into sync with longer-term momentum.
In late 2017 gold pierced its moving average and kept on going, and is now far into overbought territory. That’s a negative.
The second indicator is the $1,360/oz level, which seems to represent serious resistance. Whenever gold has gotten close (or briefly spiked above) this number, it’s been quickly smacked back down. As this is written on the evening of January 24, gold is at $1,362. Again, negative.
Bull markets frequently progress through a series of such tests, with a security or asset class trying and failing to break through – until finally it does. After which it rallies to the next, much higher resistance level.
Where is gold in this process? Will it have to bounce off more technical barriers before, someday in the indeterminate future, rising to its intrinsic value of $5,000 – $10,000? Or will today’s overwhelmingly positive fundamentals (spiraling global debt, rising inflation, the falling dollar, cryptocurrency profits looking for a home, Chinese and Russian gold demand, alarming geopolitical crises everywhere) bring sound money back into style sooner rather than later?
Technical analysis deals in probabilities, and based on the history of the above indicators the highest percentage bet would be to take some profits after Wednesday’s spike. But based on fundamentals — which are now a raging fire in the fiat currency theater from which everyone will soon be fleeing – selling precious metals or related mining stocks here risks missing out on what could be an epic bull market.
Put another way, technical indicators presume a consistent, continuous environment in which past is prologue. So they usually work, but become obsolete when the world changes in fundamental ways.
If a crisis (like the 2008 housing bust) decimates the financial Establishment, or a new idea (like the dot-coms or bitcoin) captures the world’s imagination, the result is a discontinuity in which old indicators lose their meaning. How many resistance levels do you think bitcoin blew through on its way to 19,000? How many support zones did Lehman Brothers pierce on its way to zero? Probably too many to count.
Gold and silver will eventually be caught up in a similar mass awakening. The only questions are when it happens and what sets it off.
The possible catalysts are multiplying, with an especially interesting new one being the gold-based cryptocurrencies now being planned that might make gold and eventually silver as portable as a credit card. Another is the panic out of bonds that will ensue if interest rates rise just a little more (1% of the global fixed income market flowing into gold would send it past $5,000 without a backward glance.).
Barring a major catalyst, the steady accumulation of debt at every level of every major society will still force a monetary reset, which is another term for massive devaluation of fiat currencies against real stuff, including gold.