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Should we buy gold after a reversal in price trends

Dean Christians
2022-02-17
A composite trend model for gold reversed from a bearish to a bullish price trend regime. Let's assess the outlook for gold after similar trend changes.

Key points:

  • A composite trend model for gold shows 8 out of 10 components with a positive trend 
  • The recent change in the composite score comes after 10 out of 10 components showed a negative trend
  • Similar trend score changes preceded weak returns for gold on a medium-term basis

A bearish to a bullish reversal in trend indicators for gold
If I put my subjective technical analysis hat on, I would describe the chart of gold as constructive. The gold bugs describe the current chart setup as a bullish cup and handle pattern. 

A composite trend model for gold recently increased to 8 out of 10 components with a positive trend. The shift comes after 10 out 10 members showed a negative direction. Let's conduct a study to assess the outlook for gold after similar trend score reversals.

Similar signals show weak results on a medium-term basis

This signal triggered 16 other times over the past 52 years. After the others, Gold future returns, win rates, and risk/reward profiles were underwhelming across all medium-term time frames, especially the 1-month window. The 1-2 week time frames suggest that gold could drift higher, especially given the Russia/Ukraine situation. Even if this time is different, it's unlikely that we would see gold prices zoom higher as 13 out of 16 instances showed a negative return at some point in the first 2 months. The 1976 instance is the only case where gold never looked back.

What would get me more excited about gold

The following chart shows the distance above or below the 200-week moving average for the gold to S&P 500 ratio. If the ratio can climb above the 200-week average for a sustained period, that would be a significantly more positive development.

What the research tells us...

The reversal in a composite trend model for gold suggests that the commodity could drift higher in the near term, especially given the Russia/Ukraine situation. However, trend reversals for gold have historically shown underwhelming results, win rates, and risk/reward profile on a medium-term basis. If the gold to S&P 500 ratio can climb above the 200-week average, I'm on board.

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