Sentiment Speaks - We Need To See A Dollar Consolidation (Not Crash) For Gold To Rally

by: Avi Gilburt

- Price action over the past week.

- Anecdotal and other sentiment indications.

- Price pattern sentiment indications and upcoming expectations.
Price Action Over the Past Week
The market followed through to the downside right towards our long term support regions we have been noting since we identified this corrective downside action.
Anecdotal and Other Sentiment Indications
Isaac Asimov once said: "Your assumptions are your windows on the world. Scrub them off every once in a while, or the light won't come in."
So, let's scrub some assumptions.
Many have certain assumptions they hold to be truth. One recent assumption I saw revived by the gold bulls is that "seasonality" will certainly cause gold to rally strongly in the fall this year. Well, I hear no one pointing out that this failed last year and it has thus far failed this year. In fact, the market moved in the opposite direction of such expectations. But, the bigger problem I have is that those who were proffering this perspective just only weeks ago as they were pounding the table about an impending rally have now gone silent to this perspective. Is this the intellectual honesty we should be demanding of those we read?
Another common mantra is that gold moves opposite of the dollar. So, when one sees a dramatic move in the dollar, one automatically assumes we will see an equally dramatic move in gold. It really is a shame that history does not support this perspective.
The common expectation is that a dramatic move in the dollar will certainly "cause" an equally dramatic move in gold. And, we are hearing this quite loudly in today's market, with many even calling for relative movements in each in a linear fashion. I know that no matter what facts I show, most will still discount my presentation, since they "know" otherwise, but feel free to ignore the facts of history at your own peril.
So, for those with an open mind, let's actually look at the history of the two put together on a chart going back over 30 years.
DXY/Gold Click to enlarge
As you can see, the price of gold topped in 1980, which was well before the price of the DXY began to rally in 1981. Now, in 1981, when the dollar began its powerful rally, the price of gold was around $400 an ounce. And, after the initial 2 year rally in the dollar, gold still closed the year of 1983 near $400. Also, take note of the strong rally seen in 1982 in the dollar, with gold also seeing a rally during the year at the same time. Not possible, right? Well, we have seen this happen many times in history.
Now, the first major move down we have seen on this chart was a drop in the dollar of almost 50% starting in 1985. Yes, this was the most dramatic move by the dollar during this entire time frame.
Yet, during that dramatic dollar decline, gold could not even muster enough power to move back over the highs it struck in 1980. Heck, it could not even muster enough power to move back over the lower high it struck in 1983. Let's be honest here. The most dramatic decline in recent history in the USD saw almost no relative correlative movement in the price of gold.
Would not a true correlative or causative relationship almost require gold to have strongly exceeded the high struck in 1980 with such a dramatic decline seen in the dollar? This alone should make you question this theory, but there is more.
Between 1995-2002, the DXY experienced another strong rally. Yet, during that time, did we see a commensurate strong price drop in gold? No, for the most part you can say it had a downward bias, but for the largest part of that dollar rally, it mostly just went sideways.
Then in 2001, the dollar did top and gold did bottom. But, take note that the bottom was just below the bottom struck in 1985 when the dollar hit is major peak. Is this the type of correlation we would expect?
And, then, we saw one of the largest and strongest rallies in gold's history. Yet, during that same time, all the dollar did was consolidate sideways. Is that the type of correlation we would expect?

In fact, if you look closely at certain periods of time, you would even note times where the dollar and gold both rallied over 10% together!
I guess the most honest perspective we can glean from this chart is that when one of these instruments moves big, the other is likely consolidating. That is probably the most honest "correlation" I can come up with. But, to assume that a rally in the dollar will certainly "cause" a commensurate drop in gold or vice versa is simply not supported by market history over the last 40 years. But, I am sure many will disagree since they "know" otherwise.
Price Pattern Sentiment Indications and Upcoming Expectations
As long as the market holds over our primary long term support regions, I still maintain the perspective that we are completing a corrective pullback in the complex. The ideal supports are the 16 region in silver, 111/112 in GLD and 19.80 in GDX. As I have noted before, we can certainly see a spike below those ideal support regions to scare investors, but if we see a relatively immediate reversal from those spikes, that is usually the sign we see when the market forms a bottom.
At this point in time, I still have many signals that we "should" be bottoming. And, as long as we remain over support, I maintain that this is just a corrective pullback in a larger bull market mover off the December/January lows, with an estimated 70% probability. Should we see silver break down below 15.50 and GDX break below 16.50, it shifts the probabilities towards new lower lows seen in the complex.

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