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Gold is a Bad Inflation Hedge. Still Watching CPI?

Similarly to crude oil, gold did not start November in the best possible way. The price of the yellow metal reached $1237.50 on the first day of the month, but was down to $1196 by November 13th. Unlike crude oil prices, however, bullion managed to reverse the negative trend and bounce up to $1230 yesterday.

According to traditional wisdom, gold is the best hedge against inflation. With a strong, but slowing economy and a tightening Fed nowadays, many believe the price of gold should rise in the future. On the other hand, the truth is that gold has been an exceptionally poor inflation hedge historically. Between the years 1900 and 2000, gold’s average annual appreciation rate was 2.6%. U.S. inflation averaged 3.2% per year during the same period. Gold investors lost 0.6% a year to inflation during the entire 20th century!

So instead of relying on traditional wisdom, which is usually more traditional than it is actually wisdom, we prefer to use the Elliott Wave Principle and focus on what is really driving gold prices – market psychology. The chart below was sent to subscribers as a short-term update on Wednesday, November 14th.
Price of Gold Elliott wave chart
Eight days ago, gold was barely holding above $1200, following a steep decline from over $1236. This chart, however, gave us a strong reason to expect a rebound. The recovery from $1180 to $1243.50 looked like a textbook five-wave impulse, whose wave 4 was a triangle. The Elliott Wave theory states that every impulse is followed by a three-wave correction in the opposite direction. After that, the trend can be expected to resume in the direction of the impulsive sequence.

Gold Bounced Off Fibonacci Support

The drop to $1196 seemed to be a simple a-b-c zigzag retracement, meaning the bullish 5-3 wave cycle was complete. In addition, the bears had already reached the 61.8% Fibonacci support in wave “c”. All this information made us think $1200 was probably not a good level to short gold from. Eight days later, we now know it wasn’t.
Gold prices Elliott wave outcome
Gold headed north almost right away, adding $30 an ounce in a relatively short time. The U.S. – China trade war, Brexit woes and higher inflation expectations were among the usual suspects many experts leaned on to explain the surge after-the-fact. None of them, unfortunately, is very useful to traders, who need to prepare for the next move in advance.

The next time you find yourself waiting for a CPI report, trade war- or Brexit-related news, don’t forget to take a look at the price charts. The market might have already left a hint there in the form of an Elliott Wave setup.

What will Gold bring next week? That is the subject of discussion in our next premium analysis due out late Sunday!

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