How To Call Twists And Turns Of The Gold And Silver Markets

Includes: GDX, GLD, SLV
by: Nigam Arora

I developed the ZYX Global Multi-Asset Allocation Model, which allocates assets on a global basis between equities, fixed income securities, commodities, real estate, and currencies. The model further drills down to sub-asset classes, sectors, and sub-sectors. Since I make recommendations on based on this model, I monitor a large number of markets. Making money in gold and silver markets is by far the easiest.

Before 2008, it was real easy to make money on gold and silver. When inflation heated up, gold and silver went up. When inflation decelerated, gold and silver drifted down. When there was a geopolitical crisis, gold and silver spiked up, and as the crisis calmed down, gold and silver came down.

Over the last few years and especially in 2011, the above correlations have broken down. But the two variables that determine gold and silver prices are still the same, inflation and risk. However sub-variables have become more important. The sub-variables of inflation are deflation, disinflation, and inflation. The sub-variables of risk are risk on and risk off.

A mathematically inclined investor can easily develop a model using the above described variables and look for correlations with the gold and silver prices. The model should assign the highest weight to the variable with the most correlation to the gold price and the lowest weight to the variable with the least correlation to the price. The investor is ready to consistently call the twists of the gold and silver markets correctly as long as the investor changes the weights based on price correlation to the variables.

In this article, I will show how anyone without any knowledge of computers or math can also easily call twists and turns of the precious metals accurately.

I have been fortunate to have called gold and silver moves consistently correctly over the years. My calls have been well documented. For background the reader may refer to any of my several articles on Seeking Alpha, starting with Gold: What To Do Now.

The chart shows some of my silver calls.

The chart shows my call on the trading top in gold.

The reason making money in gold and silver is easy is because these markets typically send a clear message at the turning points. All one has to do is to listen to the message, rearrange the model using inflation and risk; that is all there is to it.

As an illustration, on December 8th morning gold spiked on a false report that European Central Bank (ECB) would sell bonds. Such a move would have been highly inflationary but at the same time providing more safety to the financial system. The message from the market was that the character of the gold had abruptly changed – gold had just become an anti-safety and pro-inflation trade.

Within minutes before it was telegraphed on the mainstream media, I learned the news was false. The absence of bond selling would have been deflationary and destabilizing. Since gold was still at its high, it was a no-brainer to give a sell signal on gold and silver because the real news was opposite the message from the spike up.

The diagram shows the message that gold and silver markets sent.

Our adaptive algorithms confirm the message shown in the diagram. Adaptive algorithms automatically change as market conditions change.

The move in gold has created plenty of trading opportunities in both gold miners and precious metals ETFs.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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