Gold Cycles: Is It Different This Time?

Gold and the Franc both function as safe haven assets, my hope has been that Gold would capture some of the flight-to-safety trade. It’s obvious that the massive move into Sovereign debt is purely a safety play designed to protect capital. And in both Europe and Japan, investors are even paying (through negative yields) for the luxury of this safety. Why then has Gold not rallied too? In the current environment, I would have expected Gold to benefit handsomely.

Gold is on the verge of beginning its 3rd Daily Cycle. On the surface, it’s at a 4 month high, but this shouldn’t be mistaken for long term strength. Rather, it’s just a natural peak in longer term Cycles. Given the risks to the economic environment, the lack of real demand for Gold makes me believe that it’s just not ready yet for a new and sustained move higher.

In the short-term, Gold has declined enough to meet the expectations of a DCL. The only question now is whether we see one more quick dip before the Daily Cycle ends. In any event, short term price wiggles are only noise in the grand scheme of our Cycle framework. We are in a waiting game with Gold; how it performs in the upcoming 3rd DC will determine whether the bear market has ended or not.

gold_price_daily_30_Jan_2015

I very much want to believe that Gold will move into a new up-trending series of Cycles, perhaps even a new cyclical bull market. But we need to remain realistic and understand that Gold is currently at a point that has served as the top, and tipping point, of each Investor Cycle for the past several years. Since I subscribe to the notion that all things move in repetitive Cycles, I’m acutely aware that Gold is still, technically, in a bear market, and is poised at the edge of the down-trending portion of the IC.

At some point, it will be “different this time”, and we will see a change in Gold’s character that is reflected in a new bull trend. At that point, recent Investor Cycle history will no longer be relevant. Similar to a satellite in orbit that needs an event to alter its course, Gold will need some catalyst to escape the pull of the bear market. Until then, we can only be guided by history. The last 7 Investor Cycles show that once speculative positions have reached current levels (as seen in the COT report), the Investor Cycle has peaked.

gold_hedgers_30_Jan_2015

On the Investor Cycle chart, Gold has seen 12 weeks and 2 full Daily Cycles of higher prices, but still has failed to exceed the peaks of the 3 most recent Investor Cycles. By this point in the IC, an asset under heavy accumulation should have exceeded at least one of those peaks, but Gold’s rise has been more muted. We need to keep this fact in mind since, over time, price always reflects demand.

Gold certainly has time during the upcoming 3rd DC to show that it’s ready for a sustained move higher, but it will need a significant change in character to accomplish this. It’s been some time since Gold has seen that sort of move; the last time a 3rd Daily Cycle was both bullish and Right Translated was during the 2011 bull market run. So unless Gold moves higher in the near future, the trend and recent history have to be respected. Through this lens, it’s only a matter of time before Gold rolls over. If it does turn out to be different this time, the 4 past Cycle Lows have formed a long basing pattern from which a new trend could be launched.

Rising tensions in Europe are quickly spreading to global markets. There is mounting evidence that the world economy is decelerating at an increasing pace, and the current rush to safety could be just a prelude to a much more vicious decline in economic activity. Barring a general crash in asset prices, current events are likely to place a significant floor under the price of Gold. Although the current Investor Cycle is positioned for 8 weeks of weakness, it is likely that the weakness will come as a continuation of the 18 month sideways pattern, and not a new bear market leg down.

gold_price_weeky_30_Jan_2015

 

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