The Golden Bull
The Long & Short of Technical Analysis
Technical analysis is the examination of price action in a chart of a given asset. Investors will utilize technical analysis to examine historical trends. Previous trends and patterns can be found repeating within the price action of an asset, like gold. By studying the past, we can have an idea of what lays ahead in the future. Let’s begin by examining the overall long-term trend of gold.
Consolidate, Uptrend, Downtrend, Repeat!
The long-term trend that can be observed in the price action of gold is that it will consolidate, or move within a sideways range, for several years, followed by breakout and commencement of an uptrend for about a decade, followed by a crash, and subsequent downtrend. The overall long-term trend of gold is up. The technical definition of an uptrend is a series of higher highs, and higher lows in terms of an asset’s price action. Gold wasn’t classified as an investible asset until 1971, when President Nixon took the entire world off the gold standard. Before 1971, gold was money, and therefore did not have major price fluctuations. After 1971, gold commenced its’ current long-term uptrend! Below, you can view a chart of gold over the last 100 years! The vertical grey lines represent recessions.
If we look at the chart of gold since 1971, we can see a series of higher highs and higher lows in terms of the price action. Basically, gold will uptrend, then move in a sideways range, and then downtrend. The entire cycle has repeated itself within gold’s long-term uptrend. Presently, gold’s price action just broke out of its’ sideways range, indicating that the beginning of a bull run, or uptrend, in gold.
In the next image, we can see gold from 1998-present. I have drawn support and resistance lines in orange from 2013-present. Support is an area known as “the floor” where the price action will have a tendency to bounce off of it and move in the opposite direction. Resistance, or “the ceiling” is an area where the price action will hit it, and generally bounce down. In an uptrend, the price action will “break”, or move beyond the ceiling. This recently happened in the price action of gold, when gold broke above $1,400.00 USD/ounce.
I have also included an indicator known as “Bollinger Bands”, which is the blue shaded area around the price action.
Bollinger bands are useful in examining the following aspects:
- The specific range that the price action will trade in within the near future.
- Determine if an asset is in a bubble or is over-extended. This can be viewed in the short-term, intermediate, or long-term trends.
- Confirm a breakout.
- Help visualize volatility.
Bollinger bands utilize statistics to determine the aspects listed above. Specifically, they will measure a 2 standard deviation move away from the mean, or average, of the price action. This tells us something meaningful about the price action! 95% of the time, the price action will stay within 2 standard deviations of the mean, or average of the price action. In other words, 95% of the time, the price action will stay within the blue-shaded area! When the price action does move outside of the bands (5% of the time), it will shortly move back within the bands. We can conclude that price action of any asset is mean reverting!
The width of the upper and lower bands also tells us something meaningful. Volatility is low when the bands are close together, like they were in the early 2000’s. A period of low volatility is always followed by a period of high volatility. When the bands begin to diverge from each other and the area between the bands gets wider, volatility increases, usually in the direction of the dominant trend. In 2002, you could see the bands slowly diverging and the price action of gold up trending! Presently, we can see the bands diverging, indicating that volatility is increasing. The volatility appears to be forcing the price of gold up!
Long-Term Inverse Correlation to the Stock Market
The stock market and gold have a long-term inverse correlation! I want to be clear that the stock market can only be compared to gold since 1971, as gold was not an investment prior to 1971 – rather, it was money! The price of gold was very stable prior to 1971, and gold’s price action only began to fluctuate after 1971. In the chart below, we can see gold compared to the Dow Jones.
Here are a few key elements of this chart:
- Both the Dow Jones and gold have long-term uptrends
- Gold and the Dow Jones have a long-term inverse correlation;
- Each time the Dow Jones was in a bubble, gold was cheap!
- Each time gold was in a bubble, the Dow Jones was cheap!
- Gold has outperformed the Dow Jones for the majority of years on a percentage basis since it became an investment in 1971.
- The Dow Jones (and overall stock market) is presently in a bubble, and gold is still cheap, even though it is on a breakout!
You may or may not have heard of the concept of asymmetrical risk. Let’s explain how this concept applies to the current marketplace and how you can reduce your risk, while simultaneously, gain the potential for a larger return on investment.
Asymmetrical risk simply means that you are risking less, than you stand to gain! In the current marketplace, you are risking less by investing in gold, than you are in the stock market, simply because the stock market is expensive, while gold is cheap! This means that there is more upside in gold, than there is in the stock market! If I had to quantify the risk in gold, I’d say you are risking that gold can drop to about $1,100.00 USD/ounce, which is presently a $400.00 USD loss per ounce, or a 27% loss. If the past performance of gold repeats itself, I’d say there is about 450% of upside in the price of gold. After all, this was the last move that gold made in its’ last bull run from 2002-2011! Would you risk a 27% loss to have a 450% gain? This is how Ray Dalio, Warren Buffet, Carl Icahn, Paul Tudor Jones, and many other famous investors think about their investments! They are consistently taking low risks to reap huge rewards! Don’t you think you should do the same???
This example assumes you are investing in gold for capital gains. There is an even stronger argument to never sell your gold because it has intrinsic value and acts as insurance against a fiat currency collapse! If you never sell your gold, technically, there is no risk of loss and at least you had the opportunity to buy it cheap! Much like actual insurance, you want to buy it before a situation gets worse, or else the insurance will increase in price and become expensive. We have all heard of people who bought gold when it was $45.00, or $200.00, or even $400.00 per ounce. Many investors ridiculed these investors for buying gold back than – who is laughing now??? Now is your chance to buy gold while it is cheap and have the final laugh in the future!
I am not alone in my projection of gold’s value by the end of the next bull run – James Rickards, the famous lawyer and investor who helped bail out Long Term Capital Management during the last stock market crash believes gold will rally to somewhere between $5,000-$10,000 USD per ounce during this bull run. James Rickards is known as an “insider” of financial markets simply because he has worked with some of the biggest names and firms in the industry.
Let’s review some of the main reasons for buying gold in the current marketplace. Gold is still cheap! We know it is cheap, because it is low, relative to the Dow Jones, or overall stock market. Gold has a long-term uptrend. Within that long-term uptrend, gold has a tendency of rallying for about a decade, then crashing for a few months to about 3 years, followed by a long-term period of consolidation at a higher-low point. After it consolidates, it repeats the cycle by breaking out and commencing its’ bull run. This is the exact point where gold is right now – in the bull-run phase of its’ cycle!
We can confirm the bull run in gold by examining its’ price action, as well as, indicators. Gold broke a long-term resistance point of $1,400.00 USD per ounce! The Bollinger bands surrounding gold’s price action are presently diverging, suggesting that an increase in volatility lay ahead. The increase in volatility appears to be driving the price of gold higher, confirming the bull run. We have a series of higher-highs and higher-lows in the price action of gold. This is the definition of an “up-trend”! There is no better way to end this article, than by stating a famous quote from Ray Dalio: “If you don’t own gold, you neither know history, nor economics”!