Gold: Is It A Safe Haven Once Again!
If you are a seasoned veteran Gold trader or even if you have only dabbled in Gold, then you already know that in times of economic and geo-political turmoil, people rush to park their money in Gold and precious metals. That is why they are called “safe haven” investments. And even the most jaded of people will admit that these times we live in now are definitely unpredictable and turbulent! You have many if not all the world’s stock markets in decline. We just witnessed Oil make a dramatic drop of almost 30% in a little more than a month. We saw natural gas make an almost 1000 pt jump in only less than 2 weeks! The US Dollar to which much of the world’s economic engine is based on is in a state of uncertainty.
Yes, if this isn’t a moment in time that can be considered a high-risk environment, I don’t know what is!
So What Does Gold Do During Market Declines?
One of the world’s major stock indexes is the S&P 500 in the USA. This is probably the most widely followed index and is most often used as an indicator or bell-weather of what the overall economic conditions are currently in the world. It’s often said that when the S&P sneezes, the world catches a cold! So let me ask you, what do you expect to happen to Gold when the S&P is in a state of turmoil, confusion and in a decline?
Take a look at the below chart:
What you see in the chart above is the performance of Gold during the biggest declines in the S&P in history. What you will notice is that 6 out of the 8 times that in these historical market declines, Gold gained. Only twice has Gold prices declined along with the market. So overall, Gold has a NEGATIVE correlation with the general stock market. I’m not going to do in depth to explore the how’s and why’s of these facts. It isn’t the purpose of this article. The important takeaway from this chart is that mostly, Gold prices rise as the stock market declines.
So naturally, the next question is: where does the S&P stand now?
Is The S&P In A Decline Now?
Take a look at this chart below:
That is the weekly chart of the S&P that is showing the massive move up that the S&P has been on or is it STILL in? From this macro view, it is very hard to say that this bullish run that it has been on for years is coming to an end. But are we in for a correction? And if we are, is it going to be a small minor correction or is it going to be a MAJOR CORRECTION where we might see a big pullback?
Now what do you see? In the above chart, I have now added some trend lines. Trend lines, in my opinion, are extremely important and are objective indicators of the end of trends whenever prices break and close below them. You can see clearly that it has broken the pink current up trend line and dropped right down and tagged the red up trend line which defines the larger last up trend. You know you have a good meaningful trend line drawn when prices actually do tag it and bounce like they have here. That makes that trend line significant. But the point here is that prices have started to break down from its current up trend. A break of that red up trend line would be really significant because that would open up prices to drop the the blue MAJOR Up trend line.
So the takeway from this is that it is quite possible that we are about to witness another one of those major declines in the S&P and that it may last for some months if not a year or two or longer depending on how things unfold.
So What About Gold? Will It Go Up Or Down?
Up to now you have just seen me talk about the S&P index. So you must be wondering am I posting about Gold? Or the S&P? Don’t worry! If you were here to find out about Gold, I got you covered!
Take a look at this monthly chart of Gold. Remember, you must see things from a macro perspective first in order to get a good idea of what it is doing in the more trade-able shorter terms.
Monthly Chart showing trends
What I want to point out in the above monthly chart is the 2 MAJOR trends that I have marked with the arrows. The thing that I want you to takeaway from this is that you have 2 back-to-back impulse waves here. If you follow wave counting, then you would know that following any impulse wave, you must have a correction. Well, we had a tremendous impulse wave up (blue arrow) followed by a smaller (red) impulse wave here. So what gives?
The obvious answer is that the red impulse wave is just part of the larger correction that prices MUST be in right now.
So now take a look at the Weekly Chart I show here below:
Gold Current Sideways Pattern Weekly Chart
What you are seeing taking place here is that following that red down trend from the historical highs, we now see that prices have been just moving sideways for a number of years now. But the important fact that I would want you to take away from this chart is that we have an impulse wave down followed by a corrective wave currently in process.
So now from the monthly chart, we have a very large impulse wave up (blue) followed by an impulse wave down (red) with that down trend impulse wave now followed by a corrective wave.
The obvious conclusion has to be that the blue up trend is part of the largest degree cycle whilst the red down trend impulse wave along with the sideways corrective wave are part of one lower degree corrective cycle as illustrated in the below chart. If we extend that logical conclusion and project forward, then if this cycle scenario is correct, the only thing that can happen is that the next wave whenever that occurs can only be down!
But don’t misunderstand me here. This DOES NOT MEAN that I am bearish on Gold RIGHT NOW. On the contrary, in fact, we are LONG in Gold as of the time of this article!
Monthly Chart showing possible wave cycles
So now without even having done any wave labeling, we have already built a very good wave analysis and based just on that, have determined that at least on the LONG TERM BASIS we should be looking for Gold to trend down and possibly drop powerfully! But when we are speaking about Gold on the LONG TERM, we are referring to YEARS and possibly MANY YEARS for that to take place. Unless you are investing in some Gold fund for retirement and will be holding positions for the long term, we need to drill down more to lower time frames in order to find possible very good trading opportunities in the present. And that would mean having to break down the current corrective wave.
But first in order to do that, we need to put the lipstick on the pig and do some wave labeling…….so let’s do that.
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