Recently, we were asked “whether it was time finally to get out of the 12-month holding on dollar?” Dollar did not move for 12 months. There was another query regarding gold, “Should I sell it?” Two synchronous sell queries linked with two essential and interconnected assets was not a coincidence. The emotional disturbance of holding on to an asset that is sleeping can be frustrating. But this is where counter intuitive thinking should come in. “If I have lost my patience with a certain asset, is this a sign for a potential reversal?”
What more do these two sleeping assets (stagnant performance) tell us? They tell us not only about their state but also about their inter-market connection. Dollar strengthens, gold weakens, and vice versa. Here, both are sleeping. No asset can sleep for long. Dollar and gold are significant assets. Expecting them to keep sleeping is an illusion. Now, whether one will break upwards and the other down is also cause and effect. We are in unprecedented times and negative correlations are far from clock work; correlations work and fail.
Just like we have performance rankings for assets, assets could be also ranked on sleep factor. Which is the top sleeping asset? Which asset is ready to wake up? The idea of what is best today will be worst tomorrow can be extended to what is sleeping today will wake up tomorrow? Gold was one top asset 17 months back. This is why we should not be surprised it went to sleep. Gold (dollar terms) is negative (down 12 per cent) over the 17-month period. Dollar suffers from a similar stagnating negativity. So, counter-intuitively a sleeping gold or dollar should alert us.
There is another reason why premium assets or inferior goods need more than conventional models like the sleep factor model. Natural gas is like an inferior good. There is an oversupply, oil prices are muted, and hence natural gas remains at the bottom of the ranking table for 36 months. This is one super sleeping laggard. Gold and dollar are premium assets. You just can’t expect them to sink. That is why gold and dollar may never make it to the worst losers. And hence, never make it to a potential buy list. These top assets may drop in ranking from 100 (best in a group of assets) to 70 (ranked 70 percentile in performance), but to expect them to go in a free fall from best to worst (near zero), seems implausible based on an extreme reversion model.
Sleeping or waking is also natural and models should simulate nature. Understanding nature starts from pattern recognition. It’s an endless feedback in human mind. So, it can never be total robotics, the discretionary feedback (sleeping and waking) should keep enhancing the robot.
In conclusion, the sleep and waking system can pinpoint when gold will wake up, but we need more geometry to model how far higher it is going to go. As of now, we have to rely on the more conventional discretionary tools. Gold is a premium asset that has slept for 17 months. You can give it a few months here or there, but we don’t think you will get a better chance to buy gold than now. Gold will never move from best to worst. The on-going Elliott structure is also a consolidating sideways action that should resolve higher. Sooner than later, gold will wake up to push ahead. Whether it wakes up from $1,500 to $5,000 or $1,500 to $10,000 is a larger mathematical problem.
The author is CMT and founder, Orpheus CAPITALS, a global alternative research firm
