Take Profits In SPDR Gold Trust - NIRP Fallacy, Economic Balance, Dollar Recovery Weigh Against Gold Near-Term, Feb. 12/16, makes the case for gold prices to retreat based on the logic that the gold price run-up was due to overdone market fears. By contrast, Market Sentiment Marks A Fresh Bottom For Gold, Feb. 14/16, argues that sentiment shows the gold downtrend has ended and gold is likely to continue rising. Both articles provide good arguments and have attracted a rich set of interesting comments well worth reviewing.
In the Outlook For Gold and Gold Equities in 2016, Jan. 12/16, I charted the multi-quarter gold price trend for each year since 1990 and argued that based on past years, the odds were two in 20 of 2016 ending with gold price in an uptrend. My analysis relied on a rolling 6Q gold price regression line that captures the long-term sentiment in the price of gold, and I assumed the long-term trend would continue until the market showed evidence to the contrary.
Actual gold price deviations above and below a 6Q (or 3Q) regression line can be viewed as a combination of unpredictable day-to-day volatility combined with near-term changes in market sentiment for the longer-term price of gold. Small price moves above and below regression are relatively common and tend to reflect the day-to-day wild randomness in the gold market.
On February 11, 2016, the price of gold ended the day 14% above the 6Q regression line. Since 1970, there have been only five other times when the price of gold ended the day more than 12% above the 6Q regression line and when the 6Q regression line was trending downward. The starting date and outcomes of these deviations are as follows:
2016-02-11 - To be determined.
2015-01-20 - Gold price quickly retreated to the 6Q regression line and then dropped below the 6Q regression line.
2014-07-11 - Gold price started to decline to the 6Q regression line immediately, and ultimately dropped below 6Q regression.
1989-11-21 - Gold remained well above the 6Q regression line for several months before dropping towards the 6Q regression line, but ultimately rising again.
1985-08-16 - Gold price retreated towards the 6Q regression line but never reached it, moving sideways before rising sharply again.
1982-07-12 - Gold price retreated slightly after a few days before rising sharply for several quarters.
The gold price with 6Q and 3Q regression lines for each of these events is plotted below for easy visual inspection. For reference, the price of gold after the starting date of each event is shown in green on the charts:
Note: Actual gold prices are used in each of the above charts. Therefore, a 12% move is a different sized movement on each chart.
The above dates were found using the following algorithm:
Preparing the 6Q regression line for each day since 1970.
Computing the correlation, slope and percentage deviation of the actual gold price on the day versus the value of the 6Q regression line on the day.
Select dates when the trend has the same pattern as the Feb./16 6Q trend - i.e. days where the regression line slope was at least -0.1 with a correlation in the range of -0.22 to -1.0.
Days where the 6Q regression line was within 12% of the actual gold price were excluded - moves of 6%, 8% and even 10% above the regression line occur relatively frequently and such deviations can be attributed to day-to-day gold price variance.
Finally, days are clustered into the groups defined by the first day meeting filter criteria (i.e. > 12% move above a downtrend 6Q regression line).
Based on the gold price action through Feb. 12/16 and a review of historic prices from 2005, I estimate the odds of the gold price falling back towards the 6Q regression line by the end of Q1/16 at roughly two out of three chances. A total of three like events have formed since 2005. Two of the events ended with gold prices retreating while the outcome of the Feb. 11/16 event remains undecided.
Extending the time frame back to 1990 does not change the odds as no new events were added in the 1990s. Looking back to gold prices from 1970, the odds of gold prices falling back are closer 50/50 as two of out the three events added from the 1980s ended in gold prices rising.
I assign a higher weight to the data since 2005 since that time period aligns with the introduction of the SPDR Gold Trust ETF (NYSEARCA:GLD), which makes it easier to estimate the prevailing trend in gold price.
By design, GLD tracks gold prices very well and has the extra benefit to provide a potentially actionable signal - see Trading Gold Producers Using GLD Bullion Inventory Levels As A Signal. Although GLD is a gold price tracker, changes in GLD bullion holdings are a preferred signal relative to raw gold prices for several reasons:
Price of gold changes hundreds to thousands of times a day, with moves up and down, including one or more major counter-trend moves per day.
At the end of the market day, it is never clear which intra-day moves were real and which were simply noise.
GLD inventory has exactly one reading per day: "no change", "increased holdings" or "decreased holdings" and that reading is released about two hours after the market close.
As of Feb. 12/16, the GLD signal is to remain out of the market (trend undecided) while awaiting a second gold outflow event to confirm a go short gold equities (i.e. gold more likely to trend down) or two inflow events to go long (i.e. gold more likely to trend up) - see GoldMinerPulse Home for daily updates on the GLD signal.
So, although the odds of a new gold uptrend starting in 2016 have risen considerably since December 2015, odds still favor 2016 ending as a downtrend or perhaps a year without a defined trend. However, a resumption of gold inflow into GLD and more uptick in gold prices before we see a significant retracement in the gold price to the 6Q regression line will, however, move 2016 towards even money for the gold trend ending up or down.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.