Many people recognise gold for its historical quality, but often overlook its many statistical and financial qualities, which make it an obviously unique asset. This exclusive publication discusses the major long and medium term cycles that affect the price of gold. While the price of the yellow metal has increased more than 50-fold since 1970, the study of gold's price variations shows deeply structured mechanisms. The periods during which gold performs or corrects change very little. The statistical and cyclical approach to the gold price, which is all too rarely carried out, thus allows us to put forward some very unique patterns.

Gold's great phases of brilliance

"The peak in the price of wheat always precedes and leads to a crisis.

- Clément Juglar, precursor of economic cycles, in his book Des crises commerciales et de leur retour périodique en France, en Angleterre, et aux États-Unis, 1862.

This is what Clément Juglar, the precursor of the theory of cycles, wrote 150 years ago. Since then, nothing has really changed. Credit has developed and trade in services has overtaken agricultural trade. The fact today is that crises are always or almost always preceded by a peak in interest rates, a peak in the price of oil, and of course a minimum in the price of gold.

The price of gold has been following a powerful growth line since governments have been practising very deficit-oriented fiscal policies. Since the Great Depression of 1929, and Roosevelt's confiscation of gold in 1933, each crisis increases the value of gold a little more: gold first rose from $20 an ounce in 1932, to $35 in 1935. Moreover, we must emphasise today the role of the cost of mining gold. 80% of the gold supply comes from the mines. Thus, in the long term, despite the manipulations of some institutionalists, gold can only follow its average production cost. Estimates by the World Gold Council show that there would be two to three decades (at most) of gold extraction left, in the current state of mining processes. Finally, the reopening of many mines in 2021 partly explains the price readjustment processes.

So why is gold not performing better despite the current crisis? The answer is probably quite simple: this crisis is not like the others. Gold is benefiting from low interest rates and high inflation, but the current problem is that this dynamic is being countered by the strong economic recovery (reducing the economic risk, and the interest for investors to own precious metals). Nevertheless, we have to recognise a great quality of this crisis: that of being able to bring back structural inflation in the long term, which is very beneficial to the gold price over time.

Gold and statistics

The average daily variation measured since 1968 on the gold price is +0.035%. This gives a theoretical average annual performance of gold of +13.7%, by cumulating the average daily performances. Gold is also not very volatile: more than 2/3 of the daily variations of gold are between -1.2% and +1.26%. Conversely, it can be said that it is exceptional to see variations of more or less 2% over a day.

The chart above shows the gold price (yellow, right axis), followed by an indicator of the statistical strength of the rise or fall (black, left axis, cumulative changes in gold). We must emphasise here that the variations in gold are very well channelled, and the upward or downward movements are well defined. The indicator in black on the chart allows us to anticipate the major reversal phases of the gold price. It is important to note the bullish or bearish accumulation phases on the price: for example, the indicator rose overall between 1998 and 2001, while the gold price was falling, which constituted a buy signal (same signal down between 2007 and 2012; then signal up between 2016 and 2018, etc.).

Thus, a validation of a top on the indicator is more likely to reflect a decline in gold in the following weeks. Similarly, a sustained move below the 0 line of the indicator is a strong corrective signal for the gold price. For example, the indicator has fallen below the 0 line on several occasions (May 1981, September 1983, April 1988, November 1996, August 2012, etc.). Today, gold is in a low line similar to that of 1999/2000, 2016 or 2018. This means that gold is less likely to make large corrective moves (e.g. a drop of more than 20%). It also reflects the fact that gold is not currently in a powerful bullish phase in the near future.

Gold cyclicality

Here we perform an analysis that has never been published to my knowledge. First, we list all the weekly gold price data since 1970. Thanks to various mathematical, linear and cyclical manipulations, we obtain the graph opposite. The x-axis corresponds to the period (in months) of the dominant cycles in the gold price. This compares the period of each given cycle with its magnitude, i.e. its strength of influence on the gold price.

After conducting similar studies on stocks [Dow Jones] or crypto-currencies [Bitcoin], it is clear that gold is one of the most stable assets. Indeed, the cyclicality observed in gold is much more stable than in most other assets. This means, in mathematical terms, that the main cycles that determine the major variations in the gold price are medium-term cycles (a few months), rather than long-term cycles (a few years). Gold is an asset with a particularly stable cyclicality; and its variations are larger in the medium term.

Thus, the breakdown of the gold price shows the recurrence of a main cycle of 9 months, combined with a secondary cycle of 3 months, then a tertiary cycle of 4.5 months, followed by a cycle of 1 month, then 2.3 months and so on... As a technical aside, this curve, which grows on average quite slowly, shows us without hesitation that cycles of a few weeks have almost as much influence on gold as cycles of a few months. This very special mathematical property makes gold a very interesting investment. Thus, the fractal nature of gold (similar short-term and long-term cyclicality) is clearer than in other assets like the Dow Jones or Bitcoin.

The chart above illustrates our analysis more concretely. On the one hand, the blue curve represents all weekly changes in gold since 2015. On the other hand, the regular red curve represents the combination of the first three most influential cycles on the gold price (i.e. the combination of the 9-month cycle; the 4.5-month cycle; and the 3-month cycle). Just by combining these two cycles (ignoring 99% of the remaining cycles), we can see a clear determination of the gold price.

This statistical demonstration supports the observation of many analysts that gold reacts in stages (strong rise of at least 20% in the price during a constant period, with a double top); before a phase of stagnation of several months or years.

What is the outlook?

At the beginning of 2020 and again in 2021, we returned to the opportunities observable in the gold price [read]. Now, based on our primary cycles, what can we expect from the gold price?

Structurally, gold reacts in a complex cycle with two peaks rather than one. We should point out that our analysis is extremely simplified, due to the omission of the remaining cycles. Nevertheless, the last lows of the two main cycles calculated here were December 2020 and mid-August 2021. This effectively corresponds to the major lows of the past year. Since the 2020 low in bond yields, gold has been making more difficult progress but is still accumulating structurally bullish statistical forces.

In anticipation, we will emphasise the future peaks of the three primary cycles, including February 2022, April 2022, July 2022; with a low in June 2022. From this temporal observation, and from our previous statistical observations, we draw a first pattern of gold price evolution. Firstly, a good performance of gold before the end of 2021 (say statistically more than 10%), would fuel a more sustainable bullish movement until at least spring. Conversely, if gold were to correct again between now and the end of the year, particularly below the $1700 per ounce level, a corrective phase could begin during 2022. In any case, it appears that gold is more likely to enter a lateralisation phase, with a weak bearish potential, and a bullish potential around the average over this decade... Once again, gold prices react structurally in stages.

2022 will be decisive for the gold price. The breaking of a new all-time high in 2020 has triggered a classic corrective process, which has recently been seen in Bitcoin for example. Finally, statistically, gold has an incompressible price threshold around $1400/$1500, which also correlates with production costs. In any case, this study shows once again the statistical reliability of gold over time.