Gold has been here before… here's what happened

November 24, 2015 02:00 PM

Forecasting where gold might be headed in a year is a taller order than normal these days. Three years ago prices were at about $1,800 per ounce, which is pretty darn good given that equity markets around the world were rallying, the U.S. stock market was already three years into its bull market and gold itself was up 155% from the 2008 crisis. Since then?  It’s been in a steady decline with prices now around five-year lows.

It’s a near certainty that rates are going to rise in December, or possibly with August and September’s labor numbers, but no later than March. That doesn’t bode well for gold. At the same time, the CBOE Volatility Index (VIX) hit a four-year high in August and continued turmoil in global markets could drive many to safe haven investments. There’s also the expectation that Chinese and Indian demand will improve in Q4, which finally could help boost demand enough to move prices higher. How do we get a gauge?

We’ve seen this trading environment in gold over an extended period historically. EidoSearch used our numerical search engine to analyze the current three-year price trend from its $1,800 level to early October. When historically has gold traded in a similar fashion? What was going on during those times and what typically happens next? First, we look at the data. 

“Back to the future” shows five statistically similar instances of the current three-year pattern in gold looking at more than 40 years of historical data. In four of the five matches, in the next year gold was up or down only single digits. The only period where gold has a noteworthy move in the following year was in 1986.

There are some striking parallels from 1986 to today. The U.S. dollar was strong back then, hitting 50-year highs and we’re currently at 15-year highs today. 

There was a major oil and commodity sell-off in 1986 when crude started off 1986 at around $26 a barrel and by the end of March was at $10. This year, as we all know, crude prices and many major commodities have also been crushed and oil is down about 50% over the past year.

The major difference is interest rates. Rates were slashed four times in 1986, 50 basis points each time, with the rate dropping from 9.5% to 7.5%. And they kept going lower. We’ve been flat for years now, and rates can only go up from here. If we’re currently not seeing a rise in gold prices given what’s happening with the other major macro-economic factors, it’s hard to imagine that will happen when rates start rising in the near future.

About the Author

Dr. Steven Zhang is the CEO at EidoSearch.com, a  Ph.D. in electronic engineering and an internationally renowned expert in information processing technologies. His expertise is in the areas of signal processing, multimedia content analysis, computational intelligence, pattern classification, as well as, applications in bioinformatics and finance. 
@EidoSearch