-- Published: Thursday, 2 April 2015 | Print | Disqus
CHART OF THE WEEK
Charts and commentary by David Chapman
26 Wellington Street East, Suite 900, Toronto, Ontario, M5E 1S2
Phone (416) 604-0533 or (toll free) 1-866-269-7773 , fax (416) 604-0557
Ok that is not a picture of a gold bull market. It is anything but. But I will get to the bull market. Some analysts have in the past compared the current gold market decline (2011-2015) to the gold market decline of the 1970’s (1974-1976). So far, the current decline has seen gold lose about 41% from the September 2011 high to the November 2014 low. Gold topped in December 1974 at $190.50 and bottomed in August 1976 at $101.50 for a loss of about 47%. In some respects and argumentively trying to compare the two is difficult because the current gold market decline has gone on for considerably longer than the 1970’s decline (42 months so far vs. 20 months in the 1970’s).
Is it even fair to compare the bull market of the 1970’s with today? Many have tried. The bull market of the 1970’s got underway in August 1971 when US President Richard Nixon took the world off the gold standard. The US$ was no longer convertible into gold at $35/oz. The convertibility of the US$ was one of the key components of the Bretton Woods system. Taking away the convertibility of dollars for gold suspended one of the key components. As a result, the Bretton Woods system was effectively dead. The Bretton Woods system was replaced by a freely floating fiat currency system. Gold was also set free to find its own market level.
The bull market of the 1970’s lasted from August 1971 to January 1980 a period of 101 months. Gold topped at $875 in January 1980. That 1980 high (nominal) was not taken out until January 2008 28 years later. For comparisons, the Dow Jones Industrials (DJI) topped in September 1929 at 386 and that level was not taken out until November 1954 25 years later. Real bear markets can be long dragged out affairs.
Charts created using Omega TradeStation 2000i. Chart data supplied by Dial Data
Charts created using Omega TradeStation 2000i. Chart data supplied by Dial Data
The current bull market got under way in February 2001 although the low that month was a double bottom to the low of August 1999. Some people use the August 1999 low as the low for the long gold market that got underway in 1980. Others use the February 2001 low. I use the February 2001 low, as it was the final low before gold took off in the 2000’s. Gold topped in September 2011 so from February 2001 the bull market lasted 127 months. If one includes the current correction as being a part of the bull market then the bull is entering its 170th month. The question that begs of course is gold still in a bull market or has it actually entered a bear market?
The two gold charts above show the period 1964 to 1983 and 1996 to 2015. Each covers the same period in time. One could argue that the charts are not a whole lot different. Patterns repeat themselves. In looking at the chart one might assume that the 2011 top corresponds to the 1980 top. However, there is one key difference. The 1970’s bull market saw gold rise an incredible 2,382% from $35.40 to the top at $878.50. The 2000’s bull market rose only 662% from a bottom at $252.10 to the top at $1923. If the current bull market was to equal the gains of the 1970’s bull market than gold would need to top out at around $6,000. However, appearance is more important than equalling the magnitude of the rise. Patterns repeat themselves.
In terms of time and comparing the two charts, the current market could be equivalent to about August 1983. At that point, gold was still up 1,080% from its low of $35.40. Today gold is only up 378% from its low of $252.10. Gold would need to rise to $2,700 to meet that mark. Except in 1983 gold had entered what turned out to be a long-term bear market. That first good bottom came in 1985 near $280. Gold then rallied until 1987 eventually hitting just over $500. Gold never saw the highs of 1980 again as noted until 2008.
So has gold entered a bear market? Or is gold still in a bull market? One of the problems in trying to compare the 1970’s bull market in gold with today’s market is that prior to 1971 there was no free trading market for gold. The gold futures market did not get underway until 1974. As a result, there is in some respects insufficient history from which to draw conclusions. The periods are quite different.
Maybe the question to ask is where are we on the long-term commodity cycle? Some have said the commodity cycle is over. Over the past few years commodity prices have collapsed. But is this the end of the commodity cycle or merely a correction within the context of a long term up commodity cycle? Edward R. Dewey and Edwin F. Dakin were economists who studied long-term commodity cycles. In 1947, they published their book Cycles: The Science of Prediction. They chartered wholesale commodity prices from 1790 and what they discovered was that the long-term commodity cycle lasted 54 years peak-to-peak or trough to trough. It was roughly divided into two cycles of 27 years peak to trough and 27 years trough to peak.
Starting in 1790 (a trough) the next trough was predicted to arrive in 1844. There was a major trough for commodity prices from roughly 1837 through 1842. The next major trough was due in 1898. The 1890’s were dominated by a major depression and collapse in commodity prices. The next trough was due in 1952 and once again, the Great Depression and war saw a collapse in commodity prices that bottomed in 1949 with significant lows in 1932 and 1947. The next major trough was due in 2006. Oil bottomed in 1998, gold made its final bottom in 2001 and other commodity prices bottomed up to 2002. According to the Dewey Dakin model the next major trough is due in 2060.
Similarly, peaks were predicted for 1817, 1871, 1925 and 1979. The War of 1812 saw a peak in commodity prices while the US Civil War 1860-1864 coincided with another major peak in commodity prices. WW1 brought the next peak in commodity prices by 1920 and finally the Vietnam War and the inflationary 1970’s culminated in a major peak for commodity prices in 1980. The next major peak as predicted by the Dewey Dakin model is not due until 2033.
According to the Dewey Dakin model, the world is in a commodity bull market that could have many years to run. The last cycle trough was made from 1998-2002. If the next peak is not due until 2033 then the market is roughly half way through the current 27-year cycle. Cycles tend to sub divide into two’s or three’s so the 27 year cycle may consist of two cycles of roughly 13.5 years each or three cycles of 9 years each. Could commodities be making a half cycle low? If that is the case then once this low is determined commodity, prices could rise sharply once again.
Another cycle analyst is Ray Merriman www.mmacycles.com. Merriman has postulated that gold may have a 25-year cycle. His observations are based on limited free market trading data for gold that only began in 1971. According to Merriman the 25 year cycle bottomed in 1976 and then again in 2001 (25 years later). Using the 2001 bottom the next 25 year cycle is not due to bottom until 2026 +/- 5 years.
Merriman noted that he believed the 25-year cycle broke into either two 12.5-year cycles or three 8.33-year cycles. After 1976, gold had distinct bottoms in 1985, 1993 then again in 2001. All fit well with 8.33-year cycles. If 2001 signaled the beginning of a new 25-year cycle then the first 8.33-year cycle low came in 2008. The next one is due February 2017 +/- 17 months. That period begins around September to November 2015. If the 8.33-year cycle low occurs early then a major low could be seen as early as late 2015. These cycles overlap with the Dewey Dakin model.
The 1970’s bull market broke down starting around April 1984 when it broke its long-term uptrend line from the 1971 low. That signaled the end of the 1970’s bull market. Gold never took out its 1980 nominal high until 2008. On an inflation-adjusted basis, gold still has not taken out its 1980 high. That inflation adjusted high is now just above $2,700. The bull market that got underway in 2001 has still not broken down under two major uptrend lines.
The 1996-2015 chart shows two major uptrend lines. One comes from the 2001 low while a steeper uptrend line comes from the 2003 low. Another steep uptrend line would have occurred from 2004 (line not shown). The steep line broke when gold broke down in April 2013. But the second and possibly more important uptrend line remains intact. That line intersects with the $875 1980 horizontal line. If the 8.33-year cycle occurs as is expected a test of that line may mark that important low. If the line were to break, however, it would most likely signal that gold has entered a long-term bear market.
The Dewey Dakin model suggests that commodities could be making a half cycle low within the context of a long term bull cycle for commodities that is not due to top until 2033. The Merriman model suggests that an 8.33 year cycle is due starting sometime after September 2015 but could be as late as July 2018. If Merriman’s model and the Dewey Dakin model are lining up then a major low could be seen any time after September 2015. The uptrend line from 2003 could be a magnet. As well, the 1980 gold high could also act as a magnet. Could the final low come in anywhere around $900-$1000 and be seen in late 2015?
It is possible. Gold continues to appear that it is currently trying to make a corrective rally. Once that peak is seen expected anywhere from May to August 2015, a sharp decline could follow into a possible significant cycle low. Once that low has been made, the next phase of the bull market could get underway. Whether the analysts who believe the current decline is similar to the 1974-1976 decline is moot. Longer-term cycles are suggesting that the commodity bull market and by extension gold’s bull market has considerable further to go before it is finished.
Copyright 2015 All rights reserved David Chapman
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-- Published: Thursday, 2 April 2015 | E-Mail | Print | Source: GoldSeek.com