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Employing Multiple Tools to Forecast Gold

Take a peek at indicators in our Metals Pro Service editor's arsenal

by Dana Weeks
Updated: April 16, 2018


Editor's note: In the full version of this interview, Tom gives you his latest forecast for gold. The full version is reserved for EWI subscribers only. Learn more about our Metals Pro Service below.

Dana Weeks:  Hi. I'm Dana Weeks, and I'm here today with Tom Denham, Elliott Wave International's Senior Metals Analyst and Editor of Metals Pro Service. Welcome back, Tom. 

Tom Denham:  Hi, Dana.

DW:  So I noticed that in your gold research, you have something called the "True Strength Index." What is this, and how do you use it?

TD:  It is actually based on moving averages that are double smooth in order to try to take some of the noise out of your normal market price action. And the significant thing to me is, when I set it up so that it would give me highlighted red bars when the market's in decline and highlighted blue bars when the market is rising, it had a very nice track record of being blue in rising markets and red and falling markets and catching the turns pretty quickly. And so I'm using that now as just a little bit of confirmation and reassurance when I'm bullish-- if it's bullish too-- I feel good about that. And if it's bearish when I'm bearish, that's just a little note of confirmation. It doesn't have anything to do with the Elliott Wave principle. It's simply a technical analysis measure, and I like its performance.

DW:  Tom, you also show the Aussie dollar and the US dollar against gold futures. Talk to me about this correlation and correlations in general. Do you think they work?

TD:  Well, the Aussie dollar and gold futures have a positive correlation, which means they tend to rise and fall together. They do not develop identical patterns, and so they could have quite different patterns with different implications at a time when they're both rising or they're both falling. And so I like to look at a correlation like that any time gold is in a particularly messy period. And that's what gold has been lately. It's been up sharply, down sharply, up sharply, down sharply, and the Aussie dollar has been mostly in decline during this period. And when it has gone up, it's been very small rises. And I just like to look at a correlation like that to give me any hint that I can gain of when gold might make another turn or whether it's going to continue on its trend.

DW:  Another creative approach is your "Momentum of Relative Strength." What is this, and how do you use it alongside Elliott Wave?

TD:  It smooths out the signals that come as a market moves up and down in relationship to anything you're comparing it with. And so I'm using that in several markets to gauge which market that I'm looking at is strong and which one is weak, and that's very important. Because for instance, silver tends to be stronger than gold in rising markets and weaker than gold in falling markets. Some people talk about silver is "high beta" gold. It's more volatile. It moves faster in any direction it's going frequently. And so I like to keep an eye on whether the comparison of relative strength for silver versus gold is rising or falling. And when silver is stronger than gold in that environment, I'm happy to be bullish. And if I'm bearish in a period like that, I know to be very cautious and careful and to look for the possibility that my outlook is wrong and I need to make a change. I'm always going to use the wave pattern as my primary guide, but this is just one more of those background studies that help me to have a greater sense of what's going on with my metals.

DW:  OK. Let's talk about the yellow metal. Gold recently tested the top of its 2018 range. When is the range going to break, and in which direction do you think it will go?

TD:  I think this is a range that's not limited to 2018. I think this is a multi-year range. From the Elliott perspective, I see gold as being within a triangle correction. The first wave of that triangle began at the low in 2015. We saw the rally up into 2016. That was wave (A). Then the fall from that in 2016 was the wave (B). And the current rise up to where we are in 2018 is probably very near the end of wave (C). There have been weeks that I thought wave (C) was finished, but we've come back up to test that high. And so it's looking to me like we may edge just a small amount higher in the current move in this range-trading market. But after that, what I'm looking for is down for months in a wave (D) and then up for more months in wave (E), and I'm very strongly anticipating that the breakout is going to go to the downside. I can explain why that is-- that is that gold rallied in five waves to the peak in 2011 and that it fell impulsively in five-wave form from 2011 to 2015. That tells us that what's developing is a zig-zag, and so this range that we're in for the last several years is a triangle. And when it's finished, we should have another five-wave move to the downside to complete that zigzag pattern.

DW:  Tom, it's been a pleasure talking. I always learn something new from you. Thank you so much for coming in.

TD:  OK, Dana. Good talking to you, too.


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