Gold – does breaching its 50 DMA spell gloom?

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I reported in a post on Wednesday that the gold price had breached trend-line support and its 50-day moving average and appeared set for more downside. A bearish “triple top” formation also looked ominous. The subsequent few days witnessed roller-coaster swings with gold trading between $1,378 and $1,353 yesterday, but closing at $1,369 to remain below its 50 DMA ($1,381) for a third consecutive day.

Source: StockCharts.com

The question that invariably comes to mind is what typically happens when the gold price breaks its 50 DMA, especially after having traded above this average for an extended period. Going back to 2000, my research shows four occasions when gold traded above the 50-day line for more than 100 trading days, including the most recent occurrence that ended on Wednesday after 105 trading days. The table below shows how gold performed subsequent to dropping below the 50 DMA. Although gold did not experience significant further declines over the ensuing periods, it only started improving after a few months.

Click here or on the table below for a larger image.

Source: Plexus Asset Management

I next considered the number of calendar days between gold breaking the 50 DMA and again reaching its previous high. The table below shows that on the three previous occasions it took between five and 18 months. Adding five months to December 6, 2010 takes one through to April 2011.

Click here or on the table below for a larger image.

Source: Plexus Asset Management

Based on the small sample considered in the above study, the results would seem to indicate that the gold price might not see all that much more downside but could consolidate at the lower levels and take a while to regain its previous luster.

Considering the technical picture of gold bullion, Adam Hewison (INO.com) provides a video analysis, expecting little further downside with possible support at $1,362. Click here to access the presentation.

Hat tips: Bespoke Investment Group for the idea and Rickus for the number-crunching.

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1 comment to Gold – does breaching its 50 DMA spell gloom?

  • Pablo

    Hi Prieur,

    Thank you for this post.
    I wonder if you checked what was happening in the global fundamentals during this “below 50DMA” periods, and compare that to the current situation.

    I am well aware of the gold (and silver) rally for the last months, and the overbought conditions, but if you take the amount of different risks lurking in different areas of the global economy, it might well be sustained, and any dip bought with double force.

    Indeed, the rally in USD terms was much stronger than in other currencies, thus the dip might be bigger and persist longer, but just as yourself, I doubt it could take the price much lower from here.

    There was no positive change in the global fundamentals, that would cause gold’s ascent to subdue for some period in the coming weeks/months, and the problems are mounting rather than decreasing.

    Moreover, this time around, there is a lot of PIIGS refinancing going on in Jan/Feb, and the related sparks might bode well for strong gold demand in USD terms, even on the back of strong dollar.

    At last, if you look at gold in EUR or CHF terms, gold already recovered most of its loses from this week’s dip. I my view, it might be the fore-run for XAUUSD leg higher in the coming weeks.

    I would appreciate your comment on that and your opinion/counter-opinion.
    Thanks you in advance,
    Pablo

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