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Minyan Mailbag: Gold Shares Death Cross

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GLD should track spot gold prices, so perhaps there is a reason for a bit of worry if trading that, but if holding precious metals equities, I'm not so sure this type of signal should be undue cause for concern.

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"Prof. Goepfert,

I'm very bullish on Precious Metals. This death cross on Gold Shares (GLD) really bothers me, though. Thoughts?

- Minyan Nick"

Nick, I've written before about the tendency for the "death cross" and "golden cross" to be poor predictors of future performance - at least in terms of the direction they're expected to go.

For those not familiar, a so-called "death cross" is triggered when a security's 50-day moving average crosses below its 200-day average. A "golden cross" is just the opposite.

The problem is that the vast majority of moving average crossover systems simply do not work well as trading signals. Most securities do not trend enough to make them worthwhile given the multitude of false signals - certainly that's true in the case of, say, the S&P 500, but it might be different for gold and gold shares, so let's check.

Over the past 20 years, the AMEX Gold and Silver Index (XAU) has given 21 death crosses. Shorting the index and holding for a month would have resulted in only 6 winning trades and you would have lost of average of 1.9% on each trade. Holding for a quarter would have made you lose even more - an average of 3.2% each time.

Using the past 30 years of spot gold prices, however, there were 12 death crosses. Shorting those and holding for a month would have resulted in 8 winning trades with an average of +1.4%. Holding for a quarter would have given the same number of winning trades, and just a slightly better return.

Perhaps that reinforces the idea that equities do not trend, but commodities do (at least more often). GLD should track spot gold prices, so perhaps there is a reason for a bit of worry if trading that, but if holding precious metals equities, I'm not so sure this type of signal should be undue cause for concern.

-Prof. Goepfert
No positions in stocks mentioned.

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