Our gold model is based upon interest rates and technical inputs. Specifically, our gold model performs best when both our bond model is positive and yields on the 10 year Treasury are lower than the value 26 weeks ago. Yields on the 10 Treasury are pushing higher, and our bond model is no longer positive. Thus the “sell” signal from the fundamental portion of our gold model. However, the technical side of the equation remains intact.
First, let’s look at how gold performed when the fundamental inputs are negative. If we were so good to buy gold only during these times, you would get the following equity curve. See figure 1.
Figure 1. Equity Curve
From 1980 to 2000, this strategy performed poorly. Starting in 2000, it didn’t really matter when you bought gold, and this would be consistent with a secular bull market. It’s a “buy the dip” mentality. Bull markets have a way of making investors look great. So is the bull market in gold over? Should we ignore the fundamental inputs to the gold model?
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First, I don’t believe the bull market in gold is over, and to understand why I would make this statement, I look to gold market technicals. See figure 2 a weekly chart of a continuous gold futures contract. The red dots are key pivot points or the best areas of buying support.
Figure 2. Gold/ weekly
As long as prices remain above the key support levels at 1578, gold should remain in a bull market. A weekly close below 3 key pivot points is a consistent technical sign of a bear market that is quantifiable across multiple markets. Technically, gold remains in a bull market and prices are just above support levels. This makes for a good low risk entry point. By our measures, fundamental dynamics do not support higher gold prices, but this is a bull market in gold until proven otherwise, and a “buy the dip” mentality always prevails until it doesn’t. Prices may touch support levels, but failure at these levels would be consistent with the end of the bull market in gold.