We’ve Got a Golden Cross — Literally

by Tyler Craig | September 21, 2012 11:15 am

The blogosphere is abuzz with chatter of a “golden cross” showing up in the precious metals space. Far from a mystical religious sign, the golden cross is a popular moving average signal generated when the 50-day moving average (50 MA) crosses above the 200-day moving average (200 MA).

Stock market lore and outright common sense contend the golden cross is a bullish omen — particularly when the asset in question is in the midst of a secular bull market like gold is.

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Including the current signal, gold has only experienced a golden cross six times since 2000. That’s roughly one signal every two years — an infrequent occurrence, to be sure. The rarity of the signal can be chalked up to the fact that gold has been riding an epic secular bull market with few corrections.

Given the nature of a 50 MA, it takes a sizable, multi-month drop in price to cause the 50 MA to cross back below the 200 MA. This obviously is necessary before the next golden cross can occur.

Gold enthusiasts will be happy to learn that all five past signals resulted in profitable trades (assuming you closed the position with the 50 MA crossed back below the 200 MA). Admittedly, five signals is a paltry sampling size, and any respectable numbers-lover would warn of reading too much into such a small data set.

Regardless, it’s safe to say the golden cross has an impressive track record.

Of course, if you’ve been waiting for the golden cross before getting bullish on gold, I would argue you’ve arrived to the party later than necessary. There is a great degree of lag when an asset starts to recover from a correction before the golden cross is generated. Gold has risen roughly 200 points ($1,550-$1,750) since July. But, take heart — though the gold bulls might already have cracked open the bubbly and polished off the hors d’oeuvre, the heart of the party may be just getting started.

One play worth consideration for those owning at least 100 shares of the SPDR Gold Shares (NYSE:GLD[1]) is the stock replacement strategy.

This trade consists of selling your stock and replacing it with a long call option. The long call ties up a smaller amount of capital and therefore has less risk. If GLD pulls back in the coming weeks, you’ll lose less with the long call than you would with your stock position. It also leaves you open to additional profits if gold continues its bullish run in the coming months.

If you want to maintain your exposure to gold throughout the end of the year, you could sell your stock and buy the January 170 call for around $8.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

  1. GLD: http://studio-5.financialcontent.com/investplace/quote?Symbol=GLD

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