Resurrection for Gold Could Follow its ‘Death Cross’

Thursday, 21 Feb 2013 10:37 AM

By John Morgan

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Gold may have entered the “death cross” technical formation that often signals dismal price trends ahead, but the signal is sometimes a false one where the precious metal is concerned.

A death cross, which occurs when the price of an investment’s 50-moving average plunges below its 200-day moving average, has not recently been so accurate for forecasting gold’s price, The Wall Street Journal reported.

In fact, gold has averaged short-term gains for up to six months following the 22 death crosses that have occurred in its price chart since 1972, according to Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research.

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Even more contradictory to the death cross’ reputation, the 1.3 percent one-month gain for gold following a death cross is better than the metal’s 0.9 percent average increase for any given one-month period, The Journal reported.

The death cross is widely known among technical traders as a bearish indicator, telling them that price movement is reversing trend to the downside.

That’s exactly what happened to Apple recently. When Apple’s 50-day average slipped below its 200-day average, the stock was trading around $545. The stock closed Thursday at $448.85, a decline of more than 21 percent.

In the case of gold, it was trading at $1,571 an ounce in early Thursday action. The 200-day moving average was about $1,664, and the 50-day was at about $1,668.

An equally contradictory technical trend for gold occurs when it approaches a “golden cross,” which is the opposite of a death cross — a golden cross occurs when an equity’s 50-day moving average rise above its 200-day average, Epsilon Financial wrote in an article for Seeking Alpha.

Epsilon said that if a trader bought the SPDR Gold Shares exchange-traded fund when the last golden cross occurred in September 2012, and then sold when it approached the death cross on Thursday, the purchase would have occurred at $172 and the sale at $151, a net loss of 13.9 percent.

Since 1972, gold averages a 0.8 percent decline six months after a golden cross occurs, Detrick told The Journal.

Gold traders taking a long position may actually have more important things to worry about than a technical death cross, according to CNBC. Since the start of 2013, gold is down more than 6 percent.

“What’s really behind this is we’ve had three major risks that supported the gold market last year, which was the fiscal cliff, the possibility of Greece leaving the euro and the eurozone crisis and the third was a hard landing in China, and all of those risks have mitigated this year,” Jim Steel, chief commodities analyst at HSBC, told CNBC.

“And I think that has undercut the bullion market.”

Editor's Note: Get David Skarica's Gold Stock Adviser — Click Here Now!

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