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OPINION

Gold's buy signal

Gold's buy signal
March 13, 2014
Gold's buy signal

S&P leads the way

I still see few reasons to worry for now. It is important to watch the bigger picture, rather than fixating upon the feebleness of the FTSE 100. Aside from what’s happening in the US, UK mid-caps have only declined mildly. This is a much better barometer of the state of the bull market. The Nikkei 225 is also rallying, despite disappointing evidence that the Japanese recovery is weaker than thought before.

Mid-caps hold up

Nikkei's choppy rally

The likeliest outcome here is that the dip in the FTSE and DAX are going to result in another buying opportunity. The FTSE is merely behaving as it has been since last July, pulling back after a decent rally. Should it dip below its 200-day average and then start to bounce, I would see that as an excellent moment to go long in advance at yet another attempt to reach 6951 or so.

Where to buy FTSE again

I have spent much of the last few days digging into one of the most venerable indicators of long-term momentum in the stock market, the Coppock indicator - see this week’s main feature. Coppock is best known for its buy-signals in the stock market, but I noticed that it has just given a buy-signal in gold. The last time it did so was in May 2001, when gold was trading around $265/oz. Two years later, it had gained 40 per cent - and even that was only the beginning.

Gold's Coppock buy

Gold's last Coppock buy

The latest signal gold is of special interest to me, as a long-term bull on gold. There is a widespread belief that gold peaked at $1,925/oz (£1,159/oz) in September 2011 and has now entered a multi-year slump of the sort that it suffered for much of the 1980s and 1990s. I do not share that view and instead think that gold has been in the sort of severe correction that it underwent in the mid-1970s, which saw it halve in value and then shoot up several hundred per cent.

From a technical perspective, gold is plainly a buy right now. Its price has closed back above its 10-month moving average, as I noted recently. The Coppock upturn provides further confirmation that a potentially significant low is in place. Over time, Coppock’s official buy-signals have typically given way to excellent rallies, with some exceptions in the 1990s.

I will admit that I am not wholly comfortable with turning bullish again on gold at this point. Most of the intelligent research I read on the subject lists reasons why it should keep falling near-term. As investors keep shifting towards the stock market, gold ETF providers are selling up. Deutsche Bank reckons that this selling could see the price wilt to $1,050 in due course.

The answer to this is that it is always easy to find plenty of reasons not to buy in the early stages of strong uptrends. That is part of the case in favour of submitting ourselves to a set of rules, such as buying upon Coppock signals or when the price crosses above its 10-month moving average. Should those developments unravel, I will go bearish again.