Employing Multiple Tools to Forecast Gold

Dana Weeks:  Hi. I'm Dana Weeks, and I'm here today with Tom Denham, Elliott Wave International's Senior Metals Analyst and Editor of Metals Pro Service. Welcome back, Tom. 

Tom Denham:  Hi, Dana.

DW:  So I noticed that in your gold research, you have something called the "True Strength Index." What is this, and how do you use it?

TD:  It is actually based on moving averages that are double smooth in order to try to take some of the noise out of your normal market price action. And the significant thing to me is, when I set it up so that it would give me highlighted red bars when the market's in decline and highlighted blue bars when the market is rising, it had a very nice track record of being blue in rising markets and red and falling markets and catching the turns pretty quickly. And so I'm using that now as just a little bit of confirmation and reassurance when I'm bullish-- if it's bullish too-- I feel good about that. And if it's bearish when I'm bearish, that's just a little note of confirmation. It doesn't have anything to do with the Elliott Wave principle. It's simply a technical analysis measure, and I like its performance.

DW:  Tom, you also show the Aussie dollar and the US dollar against gold futures. Talk to me about this correlation and correlations in general. Do you think they work?

TD:  Well, the Aussie dollar and gold futures have a positive correlation, which means they tend to rise and fall together. They do not develop identical patterns, and so they could have quite different patterns with different implications at a time when they're both rising or they're both falling. And so I like to look at a correlation like that any time gold is in a particularly messy period. And that's what gold has been lately. It's been up sharply, down sharply, up sharply, down sharply, and the Aussie dollar has been mostly in decline during this period. And when it has gone up, it's been very small rises. And I just like to look at a correlation like that to give me any hint that I can gain of when gold might make another turn or whether it's going to continue on its trend.

DW:  Another creative approach is your "Momentum of Relative Strength." What is this, and how do you use it alongside Elliott Wave?

TD:  It smooths out the signals that come as a market moves up and down in relationship to anything you're comparing it with. And so I'm using that in several markets to gauge which market that I'm looking at is strong and which one is weak, and that's very important. Because for instance, silver tends to be stronger than gold in rising markets and weaker than gold in falling markets. Some people talk about silver is "high beta" gold. It's more volatile. It moves faster in any direction it's going frequently. And so I like to keep an eye on whether the comparison of relative strength for silver versus gold is rising or falling. And when silver is stronger than gold in that environment, I'm happy to be bullish. And if I'm bearish in a period like that, I know to be very cautious and careful and to look for the possibility that my outlook is wrong and I need to make a change. I'm always going to use the wave pattern as my primary guide, but this is just one more of those background studies that help me to have a greater sense of what's going on with my metals.

DW:  Tom, it's been a pleasure talking. I always learn something new from you. Thank you so much for coming in.

TD:  OK, Dana. Good talking to you, too.