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David Nichols

David Nichols

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…

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Gold -- Nothing Random About It

There is a large body of opinion that markets move in random and unpredictable ways, particularly in the short term, but that over the longer term prices adjust to reflect the true underlying value.

The majority of theories in economics and finance over the past four decades have been based in some way on this idea of market efficiency, and the essential randomness of price movement.

There are a lot of problems with this theory, but the main problem is it's just wrong.

The truth is there is nothing random about price movement. Market moves are pre-determined to an astonishing degree.

In my last commentary on April 23rd, I discussed the developing corrective pattern in gold, and how the $910 energy level was the critical balance point for this pattern.

Here's what I wrote back then, along with the chart for that set-up:

If $910 has lost its slingshot power, then gold could have a much bigger problem, as the next really powerful attractor is all the way down at $852. This means that a break under $910 should trigger a very swift decline to $852.

And here's how it worked out:

Once gold dropped under $910 -- and then came back up for the "kiss goodbye" -- it was highly likely that gold would fall to $852. It's a similar idea to predicting where a marble is going to go if you drop it in a bowl. Even if we don't know the precise path the marble will take to the bottom, we know that ultimately it's going to be "attracted" to the low spot, and end up there.

Market systems are exponentially more complex, but there is a surprising amount of similarity to the marble in the bowl. If you understand the forces acting on a market system, it's entirely possible to know ahead of time where a market will be "attracted."

Of course an exogenous shock can always come along to overwhelm the pattern -- and start a new one -- but in my experience this is very rare.

Already we're seeing evidence that $852 is still a very powerful energy level, which is not too surprising, as this was the exact level that launched the last major phase of the big uptrend -- a $180+ move to the upside.

Gold has again bounced well off this latest touch of $852, and is in the earliest stages of a possible rally pattern.

I don't quite have enough evidence yet to make a definitive projection, but there is a good chance that gold is setting up for a move up to at least $910, and possibly higher.

So we're now looking for a very specific trigger to get us back on the long side, as subscribers are ready to turn around from that last short position down to $852, and go right back into longs. We're striving to remain nimble in our outlook right now, as gold is likely to remain a "trader's market" well into 2009, as the buy-and-hold strategy that has worked so well over the past six years is overdue for a severe test.

I am also now providing fractal analysis of silver and platinum, available with the annual and 2-year subscription plans. There is a big, juicy "attractor" lying below in silver, and even though it's not close to it now, this level could deliver one of the great trades of the year -- or even the decade -- at the bottom of this current corrective pattern.


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