June 26, 2013
I love price pattern analogs, and just about anything else that will give me the answers ahead of time about what lies ahead. I also have a lot of smart subscribers who see things that I cannot and write to ask about it.
Smart guy Jeff B. wrote to ask about the resemblance of the decline in gold prices since 2011 to the price pattern in the stock market during the 2007-09 bear market. I was initially dismissive, because the top to bottom patterns did not match up very well. For one thing, the bear market in stock prices from Oct. 2007 to March 2009 only lasted 17 months, while the decline in gold since its 2011 top is going on almost 2 years. And the two periods just don't look that similar when lined up on a chart, with the tops aligned.
But while contemplating that comparison, I turned my head half sideways and found a cool new insight. The rapid decline in gold prices just recently is tracing out almost the same dance steps which stock prices laid down back in 2008-09. The point which kept me (and others) from seeing this before is the prejudicial view that the highest high and lowest low are the ones that matter. That is a biased view, and even though it is an understandable bias, it nevertheless gets in the way of allowing us to see what really matters.
Shifting the price plot just a little bit allows us to see a more complete correlation between the two price patterns, as shown in the chart above. The problem is that we have to mentally put a thumb over gold's highest price high in the summer of 2011. If one can manage to do that, then the rest of the pattern becomes evident.
When examining any price pattern analog, I like to see multiple points of similarity, and not just the top to bottom time period, or the magnitude of the price move. Those two items are fairly unimportant in the examples I have studied. What matters is overall correlation, to the greatest extent possible. There will be exceptions along the way, but if one can explain them away, then that gives greater confidence about the overall correlation.
If we take ourselves back to the summer of 2011, we can recall that silver prices were pushing up against the $50 barrier which was where the CFTC stepped in to defend us all from the Hunt brothers' attempt to corner the silver market back in 1980. When silver tried to penetrate that magic $50/oz level again in 2011, the CFTC once again stepped in and raised the margin requirements on silver futures, knocking prices back down in the process.
Gold had gotten caught up in that whole silver fervor back in 2011, taking gold up briefly to $1900, and in a way that did not match the stock price pattern from 4 years earlier. But that was wrong for gold to have done that, and gold quickly realized the error of its ways and dropped back down to a level that was where it could resume its prior trend. Gold then proceeded to trace out roughly the same dance steps that stock prices went through from the October 2007 top to the March 2009 bottom.
Speaking of which, this pattern now suggests that this latest free-fall in gold prices is an echo of the free-fall in stock prices down into the March 2009 bottom. That is relevant now because it suggests that there actually WILL be an end to gold's price decline, contrary to what some people think, and that the rebound back up out of that presumptive bottom could be just as robust as the rebound in stock prices out of their March 2009 bottom.
