Monday, April 3, 2017

Will Gold Ride Again ?

What happened to gold the last six months could best be called being shot out of the saddle. But is it dead? If you look closely, it could be crawling back into the saddle to continue the crazy ride of 2016. Gold has been a bit schizophrenic lately, not knowing if it's a bear or a bull. Although thought of as a dog since Trump's election, it actually has outperformed all the Trump commodities YTD and has trounced the Dow by almost double so far this year - seeming determined to disguise its true identity.

Back on Feb. 14, 2016 as gold was threatening to go on a tear from its long 4 year slide, I published an article here, at TalkMarkets, and at Seeking Alpha called "Gold's Bull/Bear Status". To understand this update, you need to go back and read this. The article correctly suggested a rampage upward in gold, which is what it did throughout most of 2016. But are we still in the large scale twin parabola fractal pattern that was the premise of the article? Gold has a very strong tendency to follow fractal patterns, as do a lot of big bull markets, as I illustrated in the article.

I drew a broad sweep diagram of this twin parabola fractal over a year ago that predicted last year's gold fireworks. Where are we on that map now?

I have added the black dot to update this as of April, 2017. Despite all the short-term schizophrenia of the last few months, in the bigger picture, gold seems to still be on track to do a roughly 2x scale up of the 1970s gold bull market. If we are to replicate the previous gold bull with its downtrend in the midst of the parabolic rises, we need to replicate this:

And so far we are doing this:

The two downtrends look similar in that there is churning against the resistance early on, then a sharp resignation to the downward move well below the resistance, then a return to churning on the resistance again, which is where we're at now. MAPS is what I call Moving Average Pairs for the 140 day and 200 day EMA that I find is a good separator of bull and bear moves. If GLD does a convincing break to 125-130 soon with high volume, a second parabolic rise starts to come into play.

But it is so hard to imagine gold going into a big bull market when its natural enemy, higher interest rates, are surely on the way. We seem to be going in the direction of all of gold's natural enemies - a good stock market, a defense of the dollar, an improving global economy, and a political sea change in Washington similar to the Reagan Revolution of 1981 that accompanied the death of the previous gold bull.

But gold can be very contrary to what it's supposed to be doing. For example, you can have bull markets in both stocks and gold at the same time, as in 2002 to 2007. In 1979, the year gold went ballistic in the last bull, the Dow was actually up 4.2%. And as for interest rates, if the last gold bull market is any indication, we should anticipate ramping gold alongside ramping rates:

The price of gold is very complicated and contrary, and maybe something like the science of fractals
is the best guide to what it will do.

The lead practitioner of fractal analysis of gold that I discussed in my aforementioned article back in February, 2016, is David Nichols, who publishes the Gold Fractal Report. His short-term calls on gold are somewhat hit or miss, but for long-term moves (say over two years) his accuracy is uncanny. He correctly was saying for months in 2010, when silver and gold seemed unstoppable, that precious metals would turn into a major bear move, and he gauged the time to be February/March, 2011. Silver hit its blow-off top in April and gold closely followed with its top in August, and the great four year slide began.

What is Nichols saying for our present timeframe? In August he published an article with his call for two things - the US stockmarket and gold. In August, if you will recall, we had just suffered a brutal pair of sell-offs, one in late 2015 and the plastering of early 2016. This was before the election and few were thinking run away bull, no matter who won. Nichols bad-mouthed the bears and predicted a nice bull market in stocks:
They are expecting a repeat of 2008, with a deflationary spiral that sends assets crashing down. Many seem downright gleeful at the prospect of the market doling out a brutal punishment to those holding long positions. But that was last decade's battle. The world has moved on ...
And he had this to say about gold:
Gold is responding to the switch to tangible assets. It's got some work left to do to put the multi-year correction in the rear view mirror, but once that happens the "hot money" will pour right back into gold.
Since August, gold has indeed done some "work" just as he said, being shot out of the saddle and perhaps now clawing back to put the four year slide "in the rear view mirror" and setting the stage for gold's next run. Giddyup.