Gold Momentum Study

The Coppock curve is a price momentum indicator designed by Edwin Coppock in the 1960's to detect major equity bottoms while minimizing the risk of subsequent reversal.I recently applied this indicator to gold bullion, a beaten-up market which has fallen nearly 40% from its peak in August 2011.

The attached chart presents the Coppock curve for dollar/gold going back to 1965, using month-end prices and traditional Coppock parameters – that is, 11- and 14-month rates of change, smoothed with a 10-month weighted moving average.

The price of gold is highlighted in red at times when the Coppock curve is rising. As you can see, the indicator has done a reasonable job of keeping one invested during bull markets and uninvested during bear markets.

The current Coppock reading is minus -46%. Since gold was floated, there have been six other observations below -30%. These cases are marked with arrows at the point of first uptick in Coppock momentum. The dates are: September 1970, September 1976, April 1982, April 1985, August 1989 and March 1998. Most of these reversals produced powerful rallies – even during the secular bear market from 1980-2000. The March 1998 observation was the only failed signal, producing a negligible (one month) uptick in price.

So, what would it take to reverse the Coppock curve given the recent path of gold prices? A close above $1295 on February 28th would do the trick. This threshold drops to $1220 by the end of March (assuming a February repeat of January’s close). Barring a collapse in price, then, Coppock momentum is set to reverse from deep negative territory. This suggests that gold is due for a rally – perhaps a sharp rally.

There is, of course, nothing magic about the Coppock curve. A mathematical transformation of price is just another way of “paying attention” to price. Any useful indicator must be grounded in common sense. In the case at hand, the Coppock indicator is simply saying that, after 28 months of downward trajectory, gold is deeply oversold by historic standards.

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