Gold Price Performance After Golden Crosses In The Last 4 Decades

This article is based on the latest premium edition of the Sentimentrader report (click here for a free trial). Market sentiment towards gold and silver are analyzed and put into perspective.

Gold’s daily chart is currently showing its 50 day moving average crossing over its 200 day moving average. In technical analysis, this situation is known as a “golden cross”, as it marks an uptrend.

golden_cross_gold_March_2014

Commonly, the golden cross confirms a new uptrend. One should expect a golden cross to be good news. While we are not saying the opposite, we only point out that not all similar cases in the past have turned out to be very profitable for gold.

Readers know that our focus is to bring unbiased news and analysis. In that respect, the following research, based on facts and figures, should bring an unbiased view on the history of gold’s golden crosses.

From Sentimentrader:

Below table shows the performance of gold once it triggers a golden cross. The table shows how many trading days it took before the signal reversed (the 50-day average fell below the 200-day average), along with gold’s return, maximum loss and maximum gain during the “trade”.

It also shows gold’s returns in the days, weeks and months following the initial buy signal.

The results were not impressive. By definition, gold had already been rallying by the time the golden cross took place, and more often than not it entered a period of mean-reversion after that, falling back across all time frames, and performing worse than any random time.

While gold’s 50-day average remained above its 200-day average for six months on average, there was extremely wide variation in the signals. When it worked, it tended to work extremely well, capturing several huge gains. But like all trend-following strategies, the few big winners have to outweigh all of the other signals, which are small gains or outright losses.

In gold’s case, the golden cross does not meet that test. There are some reasons to be positive on the metal, but this “buy” signal is not one of them.

golden_cross_gold_cases

This is not to say that gold will inevitably move lower in the days and months ahead. We only point out that history has shown that a golden cross has mostly not resulted in significantly higher prices, except in some exceptional cases. On the other hand, the correction of the last two years has been rather exceptional, which is in favor of at least a technical recovery of gold. So the signals are mixed for the time being. It is critical to monitor the reaction of technical and sentiment indicators on ongoing price evolution in the weeks and months ahead.

Readers can monitor market sentiment by subscribing to the Sentimentrader report (click here for a free trial).

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