Commodities : Gold Is In A Dangerous Spot

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10/18/2017 | 10:15 am
Of late, I have seen many articles postulating what moves gold up or down. We have heard all the old reasons being put forth from GDP, to a hedge against market volatility to interest rates, to the US Dollar, and many more. Unfortunately, market history simply does not support these reasons as a consistent driver of gold.
In fact, a recent article on gold suggested that “[w]e all know that gold is negatively correlated to GDP growth.” Well, since gold rose between 2000-2008, and as you can see from this attached chart that REAL GDP did as well, are we really sure that we “all know that gold is negatively correlated to GDP growth?”

In fact, take note that the stock market also rose strongly during this same period of time. Moreover, I have seen many other charts presented which offer no evidence that there is any real relationship between gold and GDP.

I have discussed this many times in the past. Correlations cannot be wholly relied upon unless you understand when those seeming correlations will end. And, since most correlation analysis does not present any indication of when those correlations will end, they are no better than using a ruler to determine your projections for any chart.

Such linear analysis will be of no use in determining when a change of trend may occur. And, one does not need such analysis to assume the current trend for anything will continue. In fact, this is likely why so many intra-market analysts have done so poorly in the last 5 years as they failed to see the coming break down in the correlations they follow (even though we were warning about these impending break downs back in 2015).

Price pattern sentiment indications and upcoming expectations

For those following us for the last six years, you would remember that we were not only accurate in our assessment for a top being struck in the metals complex in 2011, but we were also accurate in our assessment for a bottom being struck at the end of 2015.

Since that time, the market has provided us with what looks like a very nice 5-wave structure off the 2015 low, followed by a corrective pullback. Now, when I see a larger degree 5-wave structure (wave 1) being made off a multi-year bottom, followed by a corrective pullback (wave 2), I am on alert for the heart of a 3rd wave to take hold. And, in the metals complex, those are quite breathtaking rallies. For this reason, I have erred on the bullish side of the market as the market was looking like it was setting up for that 3rd wave in 2017.

However, rather than providing us the 3rd wave rally for which I was seeking confirmation, 2017 has been exceptionally frustrating as the market has invalidated several set-ups for that major 3rd wave break out.

Yet, when presented with the same opportunities on any chart, I would have probably reacted in the exact same fashion. Most of the time, the market will follow through on such set ups, while in a minority of circumstances we would see the market continue on a much larger degree 2nd wave pullback. Clearly, the market has decided that 2017 was going to be a year of consolidation.
Avi Gilburt
© 2017
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