Market Physics of Gold for 2018
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
It has been a long tough slog in the gold market since the top in 2011.Â
Here we are, more than 6 years later, still waiting for the return of a genuine bull market pattern.
There is finally some good news on this:Â 2018 should be a very good year for gold.Â We have passed through the doldrums, and there is some excitement just ahead.
The Physics of Wave Motion
In order to better understand why I'm confident that gold is ready to move, I'm going to share with you something I have not discussed openly until now.Â
It's going to take a wee bit of mental effort to think this through, but trust me -- it will be worth it.Â
First off, we have to go over what actually causes a market to move.Â It's a seemingly simple question -- people buy and sell -- but that's not what we're after.Â We need to understand what those buy and sell orders are doing to a market.
To engage in a financial market, you only have 2 basic choices:Â you can buy, or you can sell.Â It's binary.Â When you buy the energy is up, when you sell the energy is down.Â
But this up and down movement creates a transverse wave, which propagates to the right across the chart, moving with time.
The best way to understand a transverse wave is to think about what happens at a sporting event in a big stadium when the crowd starts doing "the wave" around the stadium.Â Each individual, in each section, is merely standing up and sitting down at the same time, but the motion in the wave propagates around the stadium.Â
A transverse wave moves perpendicular to the applied force.Â This animation shows a transverse wave pulse moving down a string.
Now let's think about what happens to a transverse wave when the initial driving force is very strong.Â Picture a garden hose in your hand, with an annoying kink 30 feet away.Â You give it a hard up and down move to see if you can send a strong wave down there to straighten out the kink.Â All you did was move the hose up and down strongly to launch that strong wave down the hose.Â
This is why a market quake like the one seen on election night in 2016 have such a huge effect.Â It was a massive jolt of energy. Stock markets are still being effected by it.
Those are the basics.Â Now it gets interesting.
If a wave hits a hard barrier -- think a jump rope tied to a door handle -- the wave energy hits and is reflected back, but it is reflected with different polarity.Â It flips 180 degrees.
If the barrier is a soft barrier -- meaning the end point slides up and down with the wave energy -- then it is reflected back without the polarity change.
Watch that last animation again, this time watching what happens at the boundary itself.Â The wave doubles in amplitude into the reversal point.Â This is important, as this same effect is seen in markets at major trend changes.
Wave Reflections in Markets
Both hard and soft wave reflections can be seen in markets.Â It's not even difficult to observe.Â You just need to know ahead of time what you are looking for.
You also need to know that these boundaries in markets are based on time.Â They couldn't be based on anything else, as time flows along the X-axis in markets.Â