Dust flux, Vostok ice core

Dust flux, Vostok ice core
Two dimensional phase space reconstruction of dust flux from the Vostok core over the period 186-4 ka using the time derivative method. Dust flux on the x-axis, rate of change is on the y-axis. From Gipp (2001).

Thursday, January 22, 2015

Near-term struggle for gold

We have a new visitor with an interest in gold.

So let's give him (her?) something to read about, shall we?

Over the past few years I have use reconstructed phase space portraits to try to gain some insight into dynamic systems. Key features that we can identify in these diagrams are areas of stability, where some parameter is trapped into a fairly narrow range for a period of time. It appears to be nearly universal in interesting systems that there are multiple metastable equilibria, meaning more than one area where the system is stable--such systems are characterized by long periods of quiescence punctuated by rapid bursts of activity (volatility).

Since the plot shows the trajectory of the system through time, an area of stability is an area of phase space in which the system remains trapped for a long period of time relative to the shorter periods of time in which the system shifts from one region of the graph to another.

In the above phase space plot of gold x USDX, there are three regions of stability--one centered at about the 650 level, one at about the 1050 level, and one at about the 1350 level. The system has been locked into the area of stability at the 1050 level since about July 2013.

These areas of stability actually have nothing to do with gold or the US dollar. They exist because of mass psychology; and the sudden changes from one region of stability to another is a function of a rapid change in the perception of value.

What I usually look for in these plots is a sign of a breakout from an area of attraction. For instance, last week's print appears just outside the middle region of attraction. It isn't far enough outside the border (which has been placed in completely arbitrary fashion), but if the system trajectory continues to extend in its current direction for a couple more weeks, I would conclude the system is heading towards the area of attraction at the 1350 level.

Complicating this simple picture is the phase space portrait just for gold, seen below.

This graph looks remarkably like the phase space diagram for gold x USDX: there are three areas of attraction, and the system has been mired in the middle one for about a year-and-a-half. But there is a major difference--the present gold price is nowhere near to breaking out of its current area of attraction. It is currently somewhere in the middle of it, having spent most of the past year near the bottom of it.

So one chart suggests an imminent breakout, and one does not. Can they both be true?

The target for gold x USDX (assuming we do get a breakout) would be in the 1350 range, and it would be reached in about 18 weeks. Given the rate of rise of the US dollar, it would not be surprising if it reaches the 100 level in this time. The 1350 level, in this case, would be reached with a gold price of $1350 per oz, which would still be within the current area of attraction for the gold price.

It doesn't seem reasonable for both gold and the US dollar to rise so far together, unless we either accept Richard Russel's suggestion that debt represents a short position against the US dollar, or we are seeing the beginnings of a move in money down Exter's Pyramid.

1 comment:

  1. Yo dude,

    I'd think the first chart is more important than the second, since the people bidding up gold at present are more likely people who work in other currencies. Gold has done a lot more positive price work in e.g. Euros than it has in USD.

    And cos Americans don't buy physical gold.

    Good to see the lizard people are taking an interest in posts about gold on the internet, btw.