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Chart In Focus

Gold Bugs Cheer The Rain

 
Chart In Focus
 
March 21, 2014


I live near Tacoma, WA, in what is playfully known as the "Pacific Northwet".  Like the old story about the Eskimos having 31 different words for snow, we know how to make jokes about the rain here. 

The rainy season?  If you are ever planning a trip to the Pacific Northwet, you should know that the rainy season begins October 1, and ends September 30, so it is best to try to work around those dates.

The Mount Rainier Weather Forecasting Method: If you look outside, and cannot see Mount Rainier, then it's raining.  But if you CAN see Mount Rainier, then it is going to rain soon. 

What do you call a person in Washington with an umbrella?  A tourist.  Washingtonians don't tan, they rust.  We have thousands of these.

In reality, Washington does not get as much total rain as other areas of the U.S.  But we are able to spread it out across the whole winter (which lasts from September 1 to July 5), for maximum enjoyment.  New York City gets 48 inches of precipitation per year, on average, and Tacoma gets just 36.9".  And they call us the rainy place.  Atlanta can get a quarter inch of rain in an hour; we know how to spread it out over a whole weekend, like the last dollop of peanut butter in the jar. 

All of that is fun, but it does not give us an explanation for why rainfall in the Pacific Northwet would have anything at all to do with the movements of gold prices.  But this week's chart shows that there is clearly a relationship. 

Gold prices peaked back in 2011, along with rainfall totals for Tacoma, WA. And gold's decline to the Dec. 2013 price low coincided with a period of diminishing rain for Tacoma in specific, and for the northwest in general.  It is rather fun to uncover such a strong correlation between seemingly unrelated sets of data. 

But the even more fun news for gold bugs is that March 2014 has been an extremely wet month here.  Rivers are flooding.  Lakes are rising.  Slugs are multiplying and earthworms are slithering across the road (why? to get to the other side, of course).  And all of this rain is has taken the 12-month moving average up above the long term average of 36.9" per year.  That is a good piece of news for gold prices, if history is any indication.

Gold prices tend to go up and down with the rainfall in Tacoma, WA.  Why would this be?  I have no idea.  Truthfully, no idea.  All I know is what I see in the chart, about how the two data series seem to be correlated.  I can think of no fundamental reason why the two should ever be correlated, but they remain so despite my lack of insight.  Perhaps it is an El Niño thing, related to periodic global climate variation, and thus to a monetary response to farm yields.  If one could ever learn to reliably forecast Northwet rainfall, one could likely develop a good trading system for gold prices. 

How did I uncover this relationship?  The answer is that I was curious about rainfall in the area where I live (near Tacoma), and so I did what any analyst would do: I went hunting for the data.  The good news is that in the Internet age, such data are prolific and easily accessible.  You can get a time series of Tacoma rainfall history here, and Seattle rainfall in a longer history here.  Look for the "monthly precipitation listings". 

When I gathered that data, I noticed that there was a persistent pattern of bottoms in the rainfall data about every 8 years, and that this pattern just happened to match a similar pattern of price bottoms I already knew about in gold prices.  So I put gold prices together on a chart along with the Tacoma rainfall deviation from the long term average, just to make sure that what I was seeing was really true, and this is what it looked like:

Tacoma rainfall and 8-year bottoms

This chart shows gold prices and Tacoma rainfall data from 1967 to 2006, omitting the most recent surge to $1900/oz so that we can see the earlier details.  Sure enough, those 8-year bottoms in both gold prices and Tacoma rainfall seemed to line up nicely. 

Gold was not allowed to trade freely in the U.S. until 1975.  In the early years of gold's price history, the 8-year bottoms worked well with Tacoma rainfall, but some other parts of the pattern correlations during the periods between those 8-year bottoms were not quite as precise.  Gold did not explain the bubble top in 1980, for example.  But the tendency to see a bottom in both Tacoma rainfall data and gold prices every 8 years was still a persistent behavior.  Now that the gold market has become more mature, the overall correlation has been getting better with time, as the first chart shows.  And periods with more rainfall in Tacoma seems to be a good thing for gold prices, while dry years seem to be associated with falling gold prices.

This is similar to my findings in an earlier article about how more rain in New York is good for the stock market. 

The gold price bottoms in 1985, 1993, 2000, and 2008 were right on schedule with the rainfall data.  And if this pattern continues as it has been, we can look forward to a bottom for both gold prices and rainfall due in 2016.  Now is the time to start buying rain barrels, if you live in the northwest, to save up rainwater ahead of the oncoming drought. 

For now, the rain is continuing to fall in the Pacific Northwet, the Pacific tree frogs are happy, the rainfall totals are rising, and so are gold prices.  So if you are a gold bull, or a banana slug, pray for more rain in the Pacific Northwet.  But history says Washingtonians should get ready for a dry period, and for a gold bear market leading to bottom in 2016.  When that decline toward 2016 will start is a much harder question. We will be working on that, and publishing our findings for readers of our twice monthly McClellan Market Report newsletter and our Daily Edition

Tom McClellan
Editor, The McClellan Market Report


 
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