Revisiting Gold's Trading Patterns

New York (May 18)  The only constant in the market (any market) is emotion. Specifically, fear; fear of losing and fear of missing out (greed). Repetitive market patterns that are connected in some way to human emotions are the best chance we have of understanding the present and, perhaps, improving our predictions of the future. Last month, we surveyed the gold market and reported on several historical patterns that we believe are a result of trader sentiment and which are in the process of replicating.

Gold and the Dollar

Gold has a strong inverse-correlation with the dollar. There is a pattern forming that is similar to the trading in 1999-2000; both then and now, the dollar was in a trading range and gold was trading within a pennant formation. In 1999, after gold dropped out of the first pennant formation, the IMF restricted its gold sales which caused the gold price to spike higher before continuing its descent. At this time, as the pattern replicates and gold drops out of the pennant, there is unlikely to be a similar intervention by the IMF. This means that when the price-drop happens, it is likely to be "stickier" than it was in 1999 (chart below). 

Here is a closer look at the 1999-2000 time period.

Notice, in the two charts above, that the gold/dollar correlation spikes into a relatively rare positive correlation at a similar point in the pattern just before the gold price drops out of the pennant (red pointers in the charts above).

These correlated patterns continue to replicate, which leads us to expect gold to move lower and the dollar to move higher over the next several months.

Gold and Silver

The correlation between gold and silver is normally strongly positive; however, in 2012 and again in 2018, the correlation dropped suddenly before recovering. Both gold and silver seem to be replicating the pricing pattern that formed during the 2012-2016 period (chart below)

Gold and Copper

The correlation between gold and copper, while not as strongly positive as with silver, is still positive on average. There are also similar patterns developing in both the price and in the various momentum indicators of copper and gold, as during the 2014-2016 trading period (chart below).

In conclusion, similar patterns in the historical pricing data of the gold market imply that the price of gold should experience considerable weakness over the next several months.

During the 2018 Q4 market correction, our analysis showed that we were not at the start of a new bear market and that the bull market, despite being a decade-old, was not in the process of ending. As a result, our subscribers did not panic and avoided the losses that come from selling into a correction within an ongoing bull primary-trend.

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