Sunday, March 20, 2011

Gold's Four Month Habit

Gold is a very fractal animal for whatever reasons, and its inscrutable repetitious habits can be taken advantage of. As investors, ours is not to reason why; ours is to profiteer off whatever we can as long as it's legal. With that proverb in mind, let's look at an odd habit gold has - the four month phases.

David Nichols emphasizes in his work that gold tends to make its moves in well defined time frames. In a February 27, 2009 article he wrote for he describes one of those:

Although most of my work on market fractal patterns is concerned with the patterns and structures in price movement, there is also a clear time component to this amazing growth pattern in gold. Gold has been moving in 4 month units, with the hyper-growth phases -- and also the big recent correction -- consisting of 2 of these units, or 8 months.

This was clear in gold's behavior up to that date, and it certainly has been clear in its behavior since: (click to enlarge charts)

Here we see the pattern of a four or 8 month climb always followed by a four month consolidation. There are pullbacks to a nice, smoothly climbing, parallel set of 140 and 200 day EMA curves, which are the ideal buy points like clockwork. We just experienced one of these going into February. And the RSI dips to near 30 every time along with these trips to the 140, my favorite bull/bear reference. It's strange that we are just off all time highs, yet the RSI is moving around the 50 mark. The last time this happened was August 2009, and a powerful climb soon followed.

This all coincides with another time frame habit of another very related animal - the US dollar. It has an often noted 3 year cycle where approximately every 3 years it sharply dives to a new low. An excellent article on this is the one by Toby Conner in the 2/28/11 Financial Sense. The last new low was April/July 2008, and the really bad behavior of the dollar lately lends credence to Conner's projection of a dollar collapse to below the 2008 low of 70 - a sharp move from the 76 we're at now:

There seems to be a quandary over the safe-haven flight at this correction. Money doesn't want the dollar, as the above chart clearly shows, and bonds - well they are fast becoming a pariah. Cash is beginning to severely under-perform real inflation. That leaves gold and silver as the last safe-haven standing. So the 3 year habit of the dollar animal is matching up perfectly with the 4 month habit of the gold beast. How do these dumb animals know ahead of time what we shrewd humans are thinking?

Ours is not to reason why. If these creatures of habit live on, we are due for a major new profiteering gold climb starting in April.

No comments:

Post a Comment