The job of a trend follower is to indentify long-term trends as early as possible and ride them as long as possible. After a 39% decline since September 2011, we suspect that gold has become undervalued versus stocks, bonds and cash. It’s long-term trend, however, remains unhealthy or neutral at best.
Trend reversals can often be identified with very simple techniques. The outlook for gold turned negative in April 2013 when price made its first lower low in four-plus years. Gold has now spent three-plus years without making a higher high. An eventual higher high would constitute a “change of character,” providing a strong sign of trend reversal.
Until then, one should maintain a negative or neutral outlook from a trend following perspective. The current threshold for a higher high was established in March 2013 at $1393/oz. on COMEX futures and $133.69/share on GLD. A convincing move above these levels would indicate a revival of the structural bull market that began in April 2001.
There may be good reasons to suspect such an outcome… but don’t jump the gun. Corroboration is needed to determine whether the sideways action since December 2013 is a base-building process or a consolidation within an ongoing bear market. In cases like this, it’s better to be safe than sorry. There is – by definition – plenty of upside (or downside) after a long-term trend is established.