Gold in A Bear Market?

Chart created using Omega TradeStation 2000i. Chart data supplied by Dial Data.

Whenever one gets a huge washout breakdown day, as was experienced in the gold market on December 14, the gold bears come out of the closet declaring that the gold bull is dead. Well-known columnist and analyst Dennis Gartman did so the day before, declaring that he was out of gold and that he is seeing "the beginnings of a real bear market, and the death of a bull." Mr. Gartman was not the only one, as others were also touting the end of the gold bull market and saying that the bubble had burst.

Above is a weekly chart of gold from the bottom of the market in 2001. Actually there was a double bottom in gold in the $250 zone, first in 1999 and again in 2001. The weekly chart since then is a classic stair step market with a series of higher highs and higher lows. At no time since the bull market got underway in 2001 has a yearly low taken out the previous year's low, an event that could signal the end of a bull market. Even during the financial crash of 2008, the low that year did not take out the 2007 low.

As for a bubble - well, a bubble is a very emotional market. Not only does the market go higher, it goes higher than most people can imagine, and to valuations that are often unimaginable. Except that gold, unlike a stock, has no valuation except what people are willing to pay for it. But bubble markets just go relentlessly up with only shallow pullbacks. When the bubble bursts the market normally crashes. Gold has not been in a bubble market as the stair step action with a series of constant corrections is instead more indicative of a powerful bull market.

Gold is an alternative currency. Gold goes up in value as currencies (paper or fiat money) go down. Gold has been currency for 3,000 years. Some say 6,000 years. Just because the world has not been on a gold standard since August 1971 doesn't mean that gold no longer has monetary value. During the Great Depression, Roosevelt revalued gold upward, from just over $20 an ounce to $35, a 70% increase during a period when the stock market was collapsing 89%.

Gold cycles are difficult to pinpoint because the world has had free-trading gold only since the early 1970s. Ray Merriman believes gold has a 25-year cycle. His only observation thus far was a distinct low in 1976, and 25 years later the double bottom low in 1999 and 2001. The next major trough would not be due until 2024, plus or minus four years.

Further data is seen if the 25-year cycle is divided into three 8.5-year sub-cycles. Here there were significant lows in 1976, 1985, 1993, and the double bottom in 1999 and 2001. Assuming the double bottom was the end of the 25-year cycle, then the low in October 2008 was probably the first sub-cycle low of the current 25-year cycle. If that is correct, then a new 8.5-year cycle is underway. That was confirmed when gold broke out above $1,015 in September 2009, since $1,015 was the top of the previous cycle (seen in March 2008). Breaking out to new highs confirmed that the cycles remain in a long term bull market.

The 8.5-year cycle can be further sub-divided, giving us two 4.25-year cycles or three 34-month cycles. Dividing by three is the classical way of dividing cycles. During the first 8.5-year cycle, the 34-month cycle was observed in April 2003 and June/October 2006. That suggests that the final 34-month low might have been due sometime in 2009. The more powerful 8.5-year cycle low appears to have overridden that when it arrived in October 2008.

The first 34-month cycle low following that 8.5-year cycle low was thus due in July 2011, give or take four months. It is now December, so that cycle may still be in effect as it seeks to find its final low. One cannot confirm that this is the 34-month cycle low until the market breaks out to new highs above $1,910. And one cannot confirm that the low is in until the market begins the climb back and makes no further lows. The huge drop of upwards of $100 on December 14 is the kind of washout day one often sees at significant lows.

There are some similarities between the current market and the 34-month cycle low seen in 2006. That particular cycle low is circled with an ellipse on the chart. Note the similarities in the patterns including the pause that occurred on the way to the top in both May 2006 and September 2011. In 2006 that pivot was seen in February, and in the current cycle it was seen in April/May 2011. Repetition of technical patterns is not unusual in technical analysis. If the gold market can regain and break out over $1,725 in the next few weeks it would begin to confirm that a low is in.

There is some room to move lower on this current move. Strong support comes in around $1,525. A breakdown under $1,500 would certainly change the scenario and be of greater concern. The low for 2011 was seen in February and was near $1,325.

There are few signs that the bull market in gold is over. Most of the selling over the past few days has come in the paper gold market (futures) as positions were stopped out or stop sells were hit at technical levels. Unlike the broader markets, gold is still up 11.5% in US$ in 2011. Most markets are down on the year.

If this is as COTW suspects, the next 34 month cycle low would not be due until 2014. If gold is to remain in a bull market, the next 34-month cycle would also be higher than the current one.

A more important support zone is at $1,470. This is the area of a low seen on the way up to the highs at $1,910. If that were to break, it would suggest that a more serious bear is underway and that the current 8.5 year cycle may also have topped.

Despite the sharp shakedown seen on December 14 gold remains in a bull market. The conditions that created the gold bull market remain in place. The global debt deleveraging remains a work in progress and as governments print money in an attempt to slow down or stave off the collapse their currencies are devalued. These remain ideal conditions for gold as an alternative currency.

Possibly the best advice comes from renowned gold market analyst Jim Sinclair. A couple of days ago he wrote: "Close your eyes, cover up with puppies, turn the heat down, light a wood fire and take a nap. Gold is headed for $4,500 in the normal manner it always does - 5 steps forward and 4 back. RELAX!"