Regression Analysis of the Gold Bull Market

As we approach the end of 2012, there's a lot of talk about this being the 12th year of the gold bull market. While true, it's worth noting that with respect to charts, as late as 2005 there really was nothing all that special going on in the gold market (the fundamentals were a different story). What I mean is that gold had entered the $380-$500 range several times after the 1980 crash, where it was still meandering for virtually all of 2004-2005. For example, most of 1987 and 1996 were spent in that range. So, if we want to settle on a date when the 21st century gold bull market began, we have several possibilities. 

As a lower boundary, of course, we can pick the earliest date on which gold hit a price that it never touched again. That occurred in Dec 2001, with gold hitting $270 for the last time.   

Then, we can focus on the all-important $370-$500 range, choosing the date gold finally busted its ceiling since the 1980 crash. That day occurred exactly 7 years ago, around Thanksgiving of 2005. We can also pick the date when gold hit $370 for the last time and never looked back. That occurred in May 2004.

Finally, we can narrow our horizon somewhat and just look at the "QE" period since the crash low of 2008, after which gold has climbed up at a strikingly fast and regular rate, its narrow channel only broken in April of this year. (It made a low shortly thereafter, but has actually continued to climb at a similar rate, just shifted ~$75 lower.)

I'm getting into this because I chose to look at linear regressions of the gold price, and I had to pick critical dates on which to begin the analyses. A linear regression will find the line that minimizes the squared distance of the prices around it. The slope of this line will give you a good estimate of the average daily increase in price during the period you're looking at. It should be kept in mind, however, that in this analysis the residuals from the line of best fit are not independent; if price is far below the line of best fit today, chances are it will still be below it tomorrow. So it's not as good a predictive tool as would be the case if the "errors" from the line were independent of each other. But it is still informative and illuminating.

So with no further ado, here is the weekly candlestick chart with the regression lines. The vertical lines denote the critical dates I described above. (Note that they are opaque, so they cover the candlesticks for that week, but rest assured they are at minimum points). Each regression line begins at its corresponding vertical line. (You can ignore the lines parallel to the "center" regression lines for this analysis.)

The light-blue regression line is a lower bound of sorts. It captures the action of the bull market since it's very beginning in 2001, reflecting a price increase of ~$12/ month. The light-green regression line is an upper bound. It captures the rate of price increase since the 2008 low, at ~$24/month. Gold is not unexpectedly between these 2 regression lines. In fact, it is smack on another line I drew midway between them (pink), which also covers the other 2 regression lines I drew (rationale described above) which start in May 2004 & December 2005.

As you can see, I've "widened" the upper and lower boundary lines somewhat, because as price moves, the actual regression lines will slowly change in slope. But the widened light-blue and light-green bands should capture the true regression lines for awhile. Again, gold is right in the middle of those 2 lines, so right now the direction it goes is anyone's guess (i.e. it's not underperforming or overperforming). I'll be watching the action over the following weeks closely for a hint. Is the nearly perfect cup and handle that is forming going to amount to anything?

My guess is we'll continue to see a lot of volatility between the two boundary regression lines until one is emphatically breached. The lower boundary is approaching $1650 -- and as I've been saying for awhile, I don't think that level will be broken.  Nonetheless, I'm thinking $1800 won't be decisively cleared either, not until earliest April 2013 (see red circle), about 3/4 to the end of the obvious ascending wedge (see red lines). So I think gold bugs should be patient.

**Update: here is an analogous monthly chart with regression lines drawn from significant dates. The 7-year linear fit to gold since December 2005 (dark blue) is quite good, indicating that gold has grown more linearly than exponentially during that period, at ~$16/month.

Regarding the 2001 date I considered the earliest start of the gold bull market, let's look at another weekly chart. The green 89-week MA (a Fibonacci number, perhaps worth mentioning), as well as the 89-week MA of weekly highs and lows (above and below it) make as good a "natural" support system as can be. And we see that the time in 2001 I picked as the earliest start of the bull market was also the period when the 89-week MA was first touched, after which its slope has never been negative (i.e. it has gone only up).

Now, some updated charts from my long post last week. As I predicted, the PPT did not let us down, and the S&P 500 is now outperforming gold for the year.

And the DOW:GOLD ratio indeed bounced off its Fib retracement line. So, I sold my SPY holding (although there's probably further upside, seeing as the DOW's 200-day moving average was cleared Friday).

 Gold in euros still hovering around its all-time high, and bullishly, re-approaches the bottom of its channel.

The 9-year daily gold chart:

On the monthly gold chart, November looks like it will finish in the 40% channel, as I was betting on.

And some long-term silver charts... 

the linear daily:

 And the weekly: