Don't Fall for the Gold Stock Death Cross

By: Jeff Berwick | Tue, Jul 12, 2011
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Recent trader 'chatter', to use the US Government term, has indicated that some people have become concerned with the "death cross" appearing in major gold stock indices like the Gold Bugs Index (AMEX:HUI). A death cross is denoted when a short term moving average (50 day) crosses over a long term moving average (200 day).

HUI Gold Bugs Index

Certainly, with a name like Death Cross, it does sound scary! But, is it really something to be concerned about.


The Dollar Vigilante's Take on Technical Analysis

First, we should outline our take on technical analysis - or, more accurately, statistical analysis. Here, at TDV we do use charts as part of our toolkit but it is only one small part of our analysis of any investment.

It should be noted that this stance leaves us to be attacked from two groups. The first, the academic economist, usually discounts technical analysis as 100% self-fulfilling nonsense. The other crowd, the pure "technician," consider us heretics for not making ALL our investment decisions from the tea leaves in the charts alone.

Nonetheless, we have always felt no need to submit to the pressure of groups and follow our own instincts and analysis no matter if that leads us down a lonely path.

In response to the academic economists, we agree totally that there is no knowledge of the future in the chart but we disagree with academics about the utility of technical analysis.

Charts have utility to the professional investor. We use charts carefully to understand which way the wind is blowing at the moment or whether there are signs of change in the trends.

Stock price trends can usually easily be explained by economic theory. In the big picture by monetary inflation trends (one of the most important indicators we watch but one that is almost completely ignored by mainstream investors); but also, at the individual company (or stock) level we see trends explained by improving fundamentals AND outlooks. The improvement in earnings or sales may often in of itself portend more improvement ahead, especially if it is a growth business; but there are also fluctuations in valuation that tend to trend for periods of time in relation to those improving fundamentals. Granted, this says nothing about the future. But it does explain why trends exist without relying on the random walk hypothesis, or other equally unlikely theory.

Of course, from the chart technicians perspective, they don't like to hear how limited technical analysis is, and how trading off charts alone is akin to gambling.

In summary, in our opinion, technical analysis is but one tool in a speculator's and trader's tool kit.


Death Cross in Gold Stocks is Wrong Much More than Right

That being said, lets look at some statistical facts.

Looking at the HUI there has been 6 'death crosses' since 2000. Only one of them turned out to be significant, in 2008. But we were already very bearish on gold stocks at that time due to other more important indicators including money supply growth (as calculated by the Austrian School).

There were death crosses early in 2002, late in 2004, again in 2005 and late in 2006. The only time it worked was in the 2008 crash...but it would have kept you out of the gold stock market more than in over the past ten years. You would have been shaken out each of those times - which is what we have continually stated is the greater risk - being shaken off the bull.

Gold Bugs Index Death Crosses


Gold Stocks Can Lag and then Catch Up in Violent Rallies

What often happens is that gold stocks do nothing for extended periods of time, even while the price of gold itself is rising. Gold share booms are relatively shorter as a result, but they are more violent in their catch up rallies than gold prices. The only time gold shares really outperformed gold greatly was in 2001-04 (as can be seen in the chart below). Ever since then the bears have always used the relatively lackluster performance of the gold equities (relative to gold) as a bearish indicator forecasting lower gold prices.

Gold Share Outperformance

With gold up $35 to $1,566 today and close to all-time highs and with gold stocks at very attractive current valuations, the odds are much more in favor of a gold stock move to the upside than the downside.

And with all the politicos in Washington scurrying around trying to find a way to increase the debt ceiling by more than $2 trillion and the European union falling apart in front of our eyes, it seems to us that even if the "death cross" were a much more dependable indicator that it still would be risky to listen to it and be out of the gold market at this time.

 


 

Jeff Berwick

Author: Jeff Berwick

Jeff Berwick
Chief Editor
The Dollar Vigilante

Jeff Berwick

Anarcho-Capitalist. Libertarian. Freedom fighter against mankind's two biggest enemies, the State and the Central Banks. Jeff Berwick is the founder of The Dollar Vigilante, CEO of TDV Media & Services and host of the popular video podcast, Anarchast. Jeff is a prominent speaker at many of the world's freedom, investment and gold conferences as well as regularly in the media including CNBC, CNN and Fox Business.

Jeff's background in the financial markets dates back to his founding of Canada's largest financial website, Stockhouse.com, in 1994. In the late '90s the company expanded worldwide into 8 different countries and had 250 employees and a market capitalization of $240 million USD at the peak of the "tech bubble". To this day more than a million investors use Stockhouse.com for investment information every month.

Jeff was the CEO from 1994 until 2002 when he sold the company and still continued on as a director afterwards until 2007. Afterwards, Berwick went forth to live on and travel the world by sailboat but after one year of sailing his boat sank in a storm off the coast of El Salvador. After being saved clinging to his surfboard with nothing but a pair of surfing shorts left of all his material possessions he decided to "live nowhere" and travel the world as spontaneously as possible with one overarching goal: See and understand the world with his own eyes, not through the lens of the media.

He went on to visit nearly 100 countries over four years and did and saw things that no education could ever teach. He met and spoke with a plethora of amazing people, from self-made billionaires to some of the brightest minds in finance - as well as entrepreneurs from a broad range of backgrounds and locations from tech companies in southern China to resource developers in Mongolia, Thailand, Russia and Chile. He also read everything he could find on how the world really works... politically and financially. A pursuit he continues to this day.

He expatriated, long ago from his country of birth, Canada, and considers himself a citizen of the world. He has lived in numerous locales since including Los Angeles, Hong Kong, Bangkok and currently lives in Acapulco, Mexico and is building a home in Cafayate, Argentina. In essence, everything he writes about here for TDV he has done or is doing.

As well, during his travels, both real and virtual (through the internet), he met some amazing people who have a similar shared vision of what is currently going on in the world and enticed them to come aboard TDV and provide their own brand of analysis.

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TRUE MONEY SUPPLY

Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
austrian-money-supply/