Gold: Fractal Structure in Price and Time

By: David Nichols | Thu, Feb 26, 2009
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After the subtle spike in volatility in the gold market on Monday, I warned subscribers to the Fractal Gold Report that a correction was coming that should carry gold back to at least $930, and more likely the $900 area.

Market fractal patterns become more volatile right before a phase change, just as a heart will go into fibrillation as it transitions from a normal sinus rhythm to a more critical state. So when gold started "fibrillating" around the important $990 energy level, it was sending out a clear warning that this part of the hyper-growth pattern was over -- for now, at least.

This is the chart I posted after Monday's close.

Fortunately for the now-expanding rank of gold bulls, this should just be a temporary blip during a much bigger up trend, which should culminate in dramatic new all-time highs in gold by mid-summer.

Although most of my work on market fractal patterns is concerned with the patterns and structures in price movement, there is also a clear time component to this amazing growth pattern in gold. Gold has been moving in 4 month units, with the hyper-growth phases -- and also the big recent correction -- consisting of 2 of these units, or 8 months.

Below is a monthly chart where I've sketched out the timing on the bigger bull market pattern (note: I published this for subscribers at the beginning of February, so February's price is not current.)

Over the last 4 years gold has been moving in 8-month chunks, which suggests that it's under the direct influence of Martin Armstrong's "Pi Cycle", where he identified market timing patterns lasting 3,141 days -- i.e., Pi x 1000 days, or 8.6 years. Armstrong also identified a corresponding 8.6 month cycle and a 4.3 month half-cycle, and it looks like gold is faithfully following this template.

This timing cycle is suggesting that the month of February should end up as the half-way break in this latest 8-month growth phase, which should then take off higher from March to June. We'll have to pay attention to more serious weakness in March -- although I'm definitely not expecting this -- as this could be an early sign that the next 4 month period will be sideways or down.

Getting back to current situation, the big question now is whether gold will bounce at $930, or down at $900.

I actually have a very important fractal target down at $890, so if gold does break down further and head for this area it should briefly overshoot $900, and that will be an excellent opportunity to re-enter back into an initial long position.

Another thing worth looking at right here is the ratio between gold and the SPX, which has recently flipped, with gold going higher than the SPX. Even though the SPX is denominated in index points, and not dollars, this is still a useful thing to track.

Interestingly, one of the most important levels on this ratio is right at 1.0, where gold and the SPX trade at parity. With the recent spike up in gold -- and drop in the SPX -- this ratio has climbed to 1.3, but it looks like a test of 1.0 should be the next move here -- and that is going to involve a correction back down in gold, and a corresponding correction back up in the SPX.

At this point it's hard to see gold dropping much beyond $900, so the likeliest scenario is gold and the SPX will meet up somewhere around this 900 level.

I also think that gold will continue to dramatically out-perform the SPX over the coming years, although it's entirely possible -- indeed, likely -- that gold and the SPX will soon start going up together, mostly due to the effects of inflation and fiscal stimulus. Everything priced in dollars will soon start to go up, just as everything priced in Zimbabwean dollars has recently experienced a "raging bull market."

If you are interested in daily updates on the amazing growth pattern in gold, please follow this link for more information on the Fractal Gold Report.



David Nichols

Author: David Nichols

David Nichols
Fractal Gold Report

David Nichols

David Nichols publishes the Fractal Gold Report, a daily report covering the gold market using proprietary techniques that go beyond technical and fundamental analysis. The Fractal Gold Report is available by subscription here. Fractal Gold Report Disclosure.

David Nichols is a graduate of Yale University and a leader in the emerging field of fractal market analysis. This pioneering analytical approach studies the markets as chaotic, non-linear systems, addressing the predictability in financial markets. Fractal market analysis discovers the order hidden within the seemingly random chaos of the markets.

David is the editor of the Fractal Market Report and the Fractal Gold Report, daily subscription newsletters written in an easy-to-understand style that cover the markets using his proprietary techniques that go beyond technical and fundamental analysis.

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