Tuesday, February 3, 2015
Gold just flashed a major buy signal.
Last week, I told you if gold could hang on to its recent gains through the end of the month, we'd have the first long-term buy signal for gold since 2009.
Things looked dicey on Thursday after gold dropped $25. But Friday's snap-back rally did the trick. We now have a new, long-term buy signal for gold. And it could lead to terrific gains for gold bugs over the next year...
Take a look at this updated long-term monthly chart of gold with its Moving Average Convergence Divergence (MACD) momentum indicator...
As I told you last week, the MACD is often used for determining overbought and oversold conditions. But it can be used as a long-term timing indicator, too.
Without getting too complicated, when the black MACD line crosses above the red MACD line, we have a "buy" signal. When the black line crosses below the red line, we have a "sell" signal.
The red arrows on the chart indicate sell signals. The blue arrows show the buy signals.
As you can see, this is only the fourth long-term buy signal we've seen in the past decade.
The buy signal in 2005 triggered after gold had already rallied 15% off its May low. The signal lasted a little more than one year. Gold gained 37% – most of it within the first five months.
The buy signal in 2007 happened after a 15% bounce in the gold price. It lasted 11 months and yielded a 17% gain.
The last major buy signal happened back in 2009.
The financial markets were just starting to recover from the 2008 crisis. The price of gold had fallen to a little more than $700 in October 2008. It rallied to $1,000 per ounce by the time the buy signal triggered in September 2009.
Even though gold was already up 40% off its lows, the metal went on to rally another 40% over the next year. By the time the MACD indicator triggered a sell signal in January 2012, gold was trading above $1,700 per ounce.
Traders who bought gold on the MACD buy signal in September 2009 and then sold it on the sell signal in January 2012 locked in a 70% gain in a little more than two years.
Today, gold is trading almost 10% higher than where it was at the November low. It looks slightly overbought in the short term. But we should buy it anyway.
MACD buy and sell signals on a monthly chart aren't designed to pick the exact bottom or top of an asset. The signals only occur after it's clear that a trend has reversed. Traders who follow these signals will never buy at the exact bottom or sell at the exact top. But they'll capture most of the move, as long as they're willing to hold through any short-term volatility.
We now have a long-term, monthly buy signal on gold. That doesn't mean gold has to go higher today, tomorrow, or next week. It could plunge $40 tomorrow – sending traders rushing for the exits.
But I urge you to buy gold today based on this monthly signal and close your eyes to the daily action. All that matters to this signal is the price of gold at the end of each month. As long as the black MACD line is trading above the red line on the monthly chart, the long-term trend is higher.
Best regards and good trading,
Matt Badiali says a silver rally is also getting started. "If you don't already own silver, I recommend buying some today," he writes. Find out why here.
If you're looking to invest in natural resources like silver or gold, this classic interview with master resource investor Rick Rule is a must-read. In it, he reveals everything you need to know to master the resource market's cyclicality. If you catch one of these big cycles at the wrong time, you can lose a fortune. But if you catch one early, you may never have to work again...
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