Gold Price: Gold-To-Commodities Ratio Signals Breakout Pending

Monday, September 12, 2016

Our technical model for gold shows that the $1,045 per ounce low in late 2015 was of similar magnitude to the $700 low of late 2008. Consequently, a multi-year advance in price is now in the beginning stages of emerging. The situation in the world's historic monetary element is extremely tight at present - and because the ramifications for the pending advance are so significant, it is critical for investors to prepare themselves prudently at this juncture.

gold 2000-2018

The model focuses on the strength of the gold price versus the rest of the commodity complex, and the signal appears below the main chart shown above.

Generally, the commodity complex refers to the rest of the precious metals, industrial metals, the energy complex and the agricultural sector. The best measure we have to represent the commodity complex is the Thomson Reuters/Jefferies Commodity Research Bureau Index, commonly called the CRB Index. The CRB Index is composed of 19 commodities from the aforementioned sectors, and while it is not a perfect index, it is largely the best tool that we have to gain a quick glance into the world of commodity prices as a whole.

The technical model references the price of gold divided by the CRB Index, and is thus expressed in ratio form. Currently, the ratio stands at 7.3, which is a multi-decade high. For reference, the ratio stood at 1.0 in the year 2000. So while most commodities  - including oil and aluminum and cotton - have gained in price since the year 2000, we see from this ratio that the gold price has gained over 6-fold above the average commodity from the Index.

Something is happening to increase the price of gold that is not happening to the rest of the commodities. The reasons why this is occurring can only be left to speculation at present. However, as technicians, we are mostly concerned with "what" rather than trying to pinpoint the exact "why" at this juncture. The reasons will reveal themselves in time, but the opportunity to profit is now.

Breakout Signal In The Gold-To-Commodities Ratio

The technical signal for the pending gold advance is not simply that the ratio is at an all-time high above 7.0. Rather, it is the breakout seen in the ratio during the 2015 gold price low.

Refer again to the gold price chart above. Note that the ratio had consolidated between 3.5 and 6.0 in the 2011-2015 period. Then, in January 2016, gold broke out of this range and surged to 7.5.

This breakout in the ratio during a major price low is a leading indicator. For gold to break this ratio at a price low indicates that investors were accumulating gold even as most other commodities were being sold during 2015. It is a significant indicator of a multi-year advance to come, as it means hundreds of tonnes of metal were being transferred to "strong hands" during the final part of the commodity decline.

Same Signal At 2008 Low

Breakout signals in the Gold/CRB Index ratio are rare at major price lows. The last time that this signal occurred was in late 2008 when the ratio broke higher through 2.5 even as the price of gold fell during the world financial crisis. This signal occurred at the $700 gold level. Moreover, it is to be noted that after this major low, the price of gold advanced 170% over the next three years.

The sequence of events regarding the signal which formed in 2008 were as follows:

(1) Gold breaks out versus CRB Commodity Index at major price low.

(2) Gold breaks down trend resistance.

(3) Multi-year advance commences.

Gold Preparing To Break Down Trend

This sequence of events can be observed from the 2008 pattern on the chart above.

We have now observed the same breakout signal in gold versus the CRB Commodity Index that was observed in 2008. Consequently, we find gold similarly positioned at step (2) above, just below its long-term down trend pattern that has held prices lower since 2011.

Investors should consider that even despite the best first-half performance for the precious metal in over 30 years, it is likely that the majority of the advance is still to come. A similar advance of 170% from the recent low of $1,045 would put a price target for gold of above $2,800.

Update On Recent Gold Price Action

Zooming in now on the recent price of gold, we see that the above-referenced break of the multi-year down trend is still pending. This is point (2) on the sequence above.

Gold has made at least four distinct attempts to overcome this resistance level since June - yet it has not yet succeeded. Moreover, the price has continued to consolidate above support near $1,300.

Note that the long-term down trend (magenta) and the support zone (green) will be converging within the next few months -- and when two trends converge, one must necessarily break.

Based on the strength of the leading indicator signal seen in gold versus the CRB Commodity Index, we expect that it will be the long-term down trend that will give way to higher prices. Subsequently, a multi-year advance may just be commencing for precious metals.


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Christopher Aaron

Christopher Aaron began his career as an intelligence analyst for the CIA and Department of Defense. He served two tours to Afghanistan and Iraq between 2006 - 2009, conducting pattern-of-life mapping for military leaders.

Mapping shares similarities with technical analysis of the financial markets because both involve the interpretation of repeating patterns found in human nature. He is the founder of iGold Advisor, providing research on the precious metals, and iGlobal Analytics, featuring technical analysis of the global capital markets.

Christopher speaks regularly on the cyclical patterns found within the financial markets and on international policy. He has been featured in the New York Times and NPR news amongst other publications.