A Long-Term Geopolitical Argument for Owning Gold

Gold finished the last week of April on a strong note, closing in New York at $1,267.70. And the monthly average closed at $1,265.63, which compares to a 20-month average of $1,251.72 and a 40-month average of $1,225.89. We shall see if gold holds the $1,260 level, which several technical analysts I follow suggested was pretty solid support. We will also see if this monthly breakout above both the 20-month and 40-month is the start of a major new bull run, as it was back in January 2002.  

In January 2002, the price of gold for the month was $281.57, which compared to a 20-month average of $272.58 and a 40-month average of $277.73. With the monthly average above both of the longer-term moving averages, I took that as a long-term buy signal. And that worked pretty well. From a January 2002 average of $281.57, it wasn’t until November 2008 that the monthly average of $758.04 fell below both the 20-month and 40-month average. That represented a gain of $476.47/oz., or a gain of 169%.

But the sell signal lasted just one month! In December 2008, the average gold price for that month reached $819.29, which exceeded the 20-Month average of $802.41 and the 40-month average of $690.21, giving another long-term buy signal. That lasted until February 2013, when the average gold price for that month of $1,628 compared to a 20-month average of $1,674.32 and a 40-month average of $1,477.58, giving us a sell signal.

There were a few periods of time in between these major moves when a neutral price would have been justified, those being when the monthly average was above one but not both longer-term averages. And there were two false bull signals, lasting two months—namely, in October and November 2001; and again in July, August, September, and October of 2016. February and March of this year turned neutral and now April flashed a bullish signal.

With a 26+ year history of these averages, I think I would do well to respect what they are suggesting. Had I gotten out at $1,628 in February of 2013, this most recent bear market would have been much less painful since most of the gold share losses were suffered that year.

Of course, I follow the master technical analyst Michael Oliver who is very helpful to me from a similar long-term perspective. At present, as Michael told me last week, he is not too worried about downside risk for gold. But what he is watching very closely is the dollar index. If the dollar weakens, not on a daily basis but in general, that should be very bullish for gold. 

Now here’s the thing. Based on his momentum work, Michael sees a monthly close of the dollar index below 99 as indicating the likelihood of a new bear market for the dollar. The dollar index was at 98.898 when I was writing this late Friday evening. Of course the dollar trades on the weekend too, so does that qualify as a new bear signal from Michael for the dollar or does he want to see a more definitive break to be sure? It’s a question I will ask him before my show next Tuesday, so be sure to tune in.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.