Gold's Crystal Ball: A Leading Indicator For Oil Prices

EDITOR'S NOTE: Gold possesses a unique ability to serve as a leading indicator, offering valuable insights into the movements of different commodities. When analyzing the relationship between gold and oil prices, a fascinating pattern emerges. By shifting gold's price movements forward by approximately 19.8 months, a significant correlation with subsequent shifts in oil prices becomes evident. While external factors may occasionally disrupt this relationship, the overall symmetry and predictability provide valuable guidance. Looking ahead, gold's past trends suggest a potential peak in oil prices around November 2023, followed by a notable decline in early 2024. Similarly, gold's bottoming patterns align with projected bottoms for oil prices in the period of May to August 2024. Gold's prophetic role as a leading indicator offers unparalleled foresight into the future movements of commodities, notably oil.

However, it is important to note that the forecasting approach outlined above relies solely on technical analysis. While it offers valuable predictions based on historical patterns, it sorely underestimates gold's true upward price potential based on larger fundamentals. Factors such as macroeconomic trends, geopolitical events, and shifts in investor sentiment could significantly impact gold prices beyond the scope of technical analysis. Therefore, while the correlation between gold and oil prices is noteworthy, it is crucial to consider a comprehensive range of factors when assessing the future trajectory of gold.

Source: Stock Charts

Gold is valuable, not just because you can sell it for a lot of money, but also because it gives us answers that we cannot get anywhere else. Gold serves as a great leading indicator for lots of things, leading the changes in grain prices by about 15 months and foretelling the movements of oil prices by just under 20 months.

That is the trick revealed in this week's chart. The plot of gold prices is shifted forward by 19.8 months to reveal how gold's price movements get echoed later by similar movements in oil prices. It does not always work perfectly, but we should not expect perfection from something making its predictions that far in advance.

And the relationship can sometimes get disrupted when non-market forces put a thumb on the scale. The Russia-Ukraine War spiked oil prices up a lot, as the supply of Russian oil suddenly got cut off by countries who objected to Russia's invasion. That sent oil prices up to an initial peak, which was a little bit early vs. gold's prediction. But oil prices balanced that out by making a double top, with the twin tops centered on the ideal top date gold had suggested. That is an imperfect way to model oil prices, but a nice bit of symmetry after initially getting thrown off.

19-20 months ago, gold prices were making a rounding bottom before starting a slow advance toward an eventual blowoff top in March 2022. That top in gold prices equates to a November 2023 top for oil prices, assuming that the 19.8-month lag time continues working right. It has been functioning for several years, so it would be weird to see it suddenly stop working now. Afterwards, oil prices should see a meaningful decline in early 2024. Gold prices bottomed in September through November 2022, which equates to a bottom for oil prices due in May to August 2024.

Originally published by: Tom McClellan on Stock Charts