Any asset caught in a so-called “death cross” sounds doomed to a deeper slide. In the case of gold, though, the concerns are overblown.
Gold slumped again on Wednesday, falling to $1580 (U.S.) an ounce, hitting its lowest level since July. More troubling, though, the latest setback conforms to what technical analysts call a death cross, where the 50-day moving average falls below the 200-day moving average. Even though gold has already fallen nearly 17 per cent from its high, the chart suggests more declines ahead.
Not everyone is falling for the chart, though. Michael Hewson, senior market analyst at CMC Markets UK, pointed to the dismal track record for gold and death crosses: There have been six of them in the past 10 years, he argues, and just one has worked out according to plan.
Barry Ritholtz at The Big Picture gets into some detail about recent crosses – both death and golden (where the 50-day moving average rises above the 200-day moving average) varieties. And he believes the crosses say very little about future action. The death cross appeared on the SPDR Gold exchange traded fund – a good proxy for gold itself, since the fund holds gold – in April 2012. The gold fund fell another 7.7 per cent over the next 13 sessions.
However, the golden cross appeared in September after gold had rallied 12 per cent over the previous 50 trading days. Gold then fell. Now, the death cross has returned just 100 days after the golden cross, confirming Mr. Ritholtz’s skepticism.
“This hardly provides much confidence as to the acumen of these signals,” he said. “These mostly tell us where we came from, and not where we are going.”
The problem with this particular indicator is that the name might oversell its predictive abilities, given that there is nothing subtle in the words death and golden. Remember the Hindenburg Omen? That technical indicator, also lacking in subtlety, was said to signal market crashes – but appears to have flamed out in recent years.