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Gold and Oil: Be Aware of the “Spike”

“Hope and fear look different on a chart”

by Bob Stokes
Updated: July 16, 2020

Recently in these pages, we noted that bull markets in stocks tend to end with "a subtly slowing ascent" rather than with a final "spike" higher, as many investors believe. We noted historical examples of this.

It was also pointed out that, by contrast, commodities do tend to end major uptrends with a price spike.

The Wall Street classic book, Elliott Wave Principle: Key to Market Behavior, by Frost & Prechter explains why (keep in mind regarding the quote from the book that fifth waves are the final wave in the main trend of a financial market):

Fifth wave advances in the stock market are propelled by hope, while fifth wave advances in commodities are propelled by a comparatively dramatic emotion, fear; fear of inflation, fear of drought, fear of war. Hope and fear look different on a chart, which is one of the reasons that commodity market tops often look like stock market bottoms.

Crude oil offers a prime historical example. This chart shows the big spike higher going into the July 2008 high. A dramatic 78% plunge in just five months followed:

CrudeCollapse

Of course, precious metals are also commodities. Thus, the price history of gold offers another historical example of a price spike going into a peak.

This chart and commentary are from the Sept. 2, 2011 Elliott Wave Financial Forecast:

GoldFiveWaves

Commodity fifth waves in major rallies often end in a final spike higher...

Gold's wave structure is consistent with a terminating rise.

Four days after that chart published, on Sept. 6, 2011, a headline in the British newspaper, The Guardian, said:

Gold hits new high as fear stalks financial markets

There we have that word "fear" again.

On that date, the yellow metal hit a high of $1921.50 and a big decline followed. By December 2015, gold was trading at $1046.20.

Fast forward to July 13, 2020 and our U.S. Short Term Update discussed the "steep ascent" or price spike of another widely traded market that investors need to know about.

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