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Przemyslaw Radomski

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Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who takes advantage of the emotionality on the markets, and invites you to do…

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Another Useless Golden Cross Signal

Once again gold moved higher for some time, which once again made the short-term moving averages (including the 50-day moving average) rise faster than the long-term ones (including the 200-day moving average), which in turn generated the "all-important" golden cross and it is once again heavily commented by financial journalists and reported as something bullish.

There is one tiny problem with the above "analysis" - it's not analysis. Those, who are reporting this "bullish" development didn't check if it is indeed bullish – they are simply repeating the dictionary definition of the "golden cross" and they automatically assume that it applies to all markets, in which it is seen.


Golden Cross is not so Golden

This, however, does not apply to gold. We have analyzed and described the golden cross in gold and we commented on it multiple times. Yet, the vampire myth (refusing to die) about supposedly very bullish implications of the golden cross in gold is still present.

Why isn't golden cross bullish for gold? Because of the very reason why patterns are likely to work in the first place – because history tends to repeat itself to a considerable extent. Price patterns tend to repeat themselves and if one sees that a specific development repeats over and over again on a given market, then one can say that seeing that development once again has some specific implications. For instance, the RSI indicator proves to be a useful trading indicator for gold over and over again.

Moving back to the topic, what was the performance of the golden cross in the recent years?


Golden Cross – Past Performance

Before 2009, 3 out of 4 signals were good buying opportunities (the 2009 one was seen at a local top), but does this make a signal useful in a long-term bull market? Picking any 4 dates randomly between 2003 and 2009 gives us a good chance that at least 3 of them will be good or rather good buying opportunities. Consequently, there was nothing special about this particular technique until 2009.

After 2009, golden crosses have been seen at or close to local tops – in particular, the 2012 top is clearly seen along with a supposed "buy" signal from the golden cross. In 2014 the gold market formed a golden cross a few times, but the rallies were not sustained. This means that the golden cross is not a reliable bullish indicator and viewing it as such does not seem like a profitable thing to do.

Is the current golden cross in gold useless as the title of this article seems to imply? Time will tell, but what's useless right now is being excited about or putting a lot of weight to the signal that didn't work for almost a decade and there were 4 cases when it was seen close to local tops.

There are multiple factors that are important for the gold price right now, including but not limited to, the USD Index, the Japanese yen, the popular indicators (RSI, Stochastic), the less popular indicators and ratios (for instance gold to bonds and Dow to gold ratios), relative performance of gold vs. the USD Index, silver vs. gold, miners vs. gold, True Seasonal patterns. However, the golden cross is not one of them – it's a development that may be useful in other markets, but the history shows that this patterns reliability on the gold market is limited to say the least. If anything was to be expected based on the golden cross in gold, it would be a looming local top as that's what we've seen in the past several years.

For more details on the golden cross (and a big chart illustrating the above analysis) please visit our golden cross in gold definition.

Thank you.

 

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