A Historical Review of The American Gold Market - Part 2

According to the previous presentation, I had concluded based upon the data and analysis provided by David Knox Barker that the US economy was entering the final phase of the long wave cycle - winter. It was noted that during the winter phase of the cycle, the economy will go through the process of correcting the excesses of the past - a depression. It was also noted that in the previous three cycles that have taken place in the US, the end result was a deflationary depression. Yet, I clearly pointed out that investors must be aware that there was always the possibility that through intervention by government to prevent a deflationary depression, a hyperinflationary depression could result.

Therefore we now have concluded that if the long-term cycle is still valid, and the seasonal dates are accurate, then the possibility of a economic depression taking place in the US becomes highly probable through 2012(est.). What then is the prudent investor to do? Obviously one should prepare for the worst, but continue to hope and pray for the best. How then does one prepare for the worst and what should be their financial goal?

As stated in part one and confirmed by the data provided by Roy W. Jastram, investors should prepare by buying gold with the goal of maintaining their purchasing power. You will remember that the conclusion reached was that whether the economy was to experience a deflationary depression or a hyperinflationary depression, that gold ownership allowed for the investor to maintain purchasing power during the economic and political crises.

Remember that during a deflationary depression prices in general will fall as the economy weakens, yet it has been shown that gold prices, although they will initially decline, do not decline on a percentage basis as fast as other prices within the economy which therefore increases its purchasing power. In fact, toward the end of the deflationary cycle, gold prices actually rise as the economy prepares for recovery. On the other hand should the government attempt to prevent the free market response through monetary intervention - inflation, then investors can expect the price of gold to increase at a faster percentage rate than prices in general - long term. Again, historical evidence has shown that initially the general price level will rise at a faster rate than the rise in the price of gold which means that an investor is losing purchasing power, but given time the price of gold will rise above the level of general prices thereby resulting in an increase in purchasing power. (See Part 1: Value of Continental Notes in Silver Coins)

Some market analysts (deflationists) are predicting that the price of gold will soon decline to the $200.00 level and could go even lower. Yet others market analysts (inflationists) are predicting that the price of gold has recently bottomed out and has already started the next bull market which could see the price of gold rise into the thousands of dollars. Obviously they cannot both be right so who is right and who is wrong and why the confusion?

The reason for the confusion is simply because the price for gold still remains below the upper channel line of the bear market price channel which has existed for many years. Therefore, until the price breaks through the upper channel line, any price activity should be considered as a short term bear market rally within a larger bear market decline according to those who are predicting that the price of gold will continue lower. Those who are bullish on the price of gold agree that the price still remains within the long term bear market channel, yet they contend that due to government intervention in the gold market since 1995 the current price does not reflect reality. Their logic is that had the markets not been manipulated, the price of gold would have broken through the upper channel line in all likelihood back in 1997. In other words, the market price has been suppressed as it had been until 1968, and therefore, investors should witness the same explosive breakout that was witnessed back in the 1970's.

A brief look and discussion concerning the period from 1968 to 1980 will reveal that both market analysts and investors would have had advance knowledge that the gold price was going higher. Let me repeat that statement, market analysts and investors would have had advance knowledge that the gold price was going higher. How would they have known? By using K-Wave cycle analysis.

In 1975 when American citizens were once again permitted to own precious metals, market analysts and gold investors who understood the K-Wave cycle would have known that the price of gold was going to go higher due to the fact that the US economy was in the summer season - a strong season for commodity prices. They also knew that the seasons averaged about 13 years in duration and the summer season had started in 1966, which meant that commodity prices could be expected to rise until sometime around 1979. Knowing and understanding this one simple fact resulted in many investors participating in the last bull market to $850.00 per ounce. In addition, they would have also obviously known that in late 1979 early 1980 that the season was about to change to the fall, which meant a bear market in gold and commodities in general was about to start.

Remembering from the previous discussion that the complete K-Wave cycle could vary in duration from 48 - 64 years, and that the advancing phase could be from 24 - 32 years in duration, then the conclusion of the summer season in 1980 at 31 years in duration implied that the K-Wave cycle was still valid to use. Knowing also that each season could vary between 12 and 16 years, then analysts and investors would have estimated in 1980 that the conclusion of the fall season would take place sometime between the years of 1992 and 1996 and the completion of the 4th United States K-Wave cycle should occur sometime between the years of 2008 and 2012.

As was just stated, analysts would have been expecting no later than 1996 based upon the K-Wave cycle that the US economy would have made the transition from the fall season into the winter phase of the cycle - yet this did not occur. Why? Was the US economy transformed from the "old economy" to the "new economy" due to the productivity miracle, was it due to the new age of technology, or was the extension of the fall season of the cycle caused by something else that had yet to be discovered?

For the next four years (until 2000) the US economy continued to march forward - The stock market continued to rise higher as speculation increased, raw materials, commodity, and farm land prices continued to decline, overproduction continued, debt levels continued to grow, the global economies were flooded with cash, deregulation was taking place, expansion by acquisition and takeovers were increasing, there were record new stock offerings - IPO's, and all the while, individual investors followed the herd into US stocks - buying the speculative dot com's which had absolutely no performance track record to review. Without a doubt, it appeared to many that an economic miracle had taken place - the long-term cycle had finally been broken. In fact, it then appeared that the US economy would not have to experience the winter phase of the K-Wave cycle and instead would continue to prosper for many years ahead. The Clinton administration working with the Fed Chairman Alan Greenspan was credited for the success that together they had achieved.

Yet at the same time there were some market analysts who refused to accept the conclusion that the picture being painted was the result of sound economic reasoning. Their reasoning was that the system had not been purged from the prior excesses, stock PE ratios were well above historic norms, and most notably, there appeared to be a problem with the inverse relationship between long term interest rates and the price of gold - Gibson's Paradox. Could it be that manipulation of the gold market was behind this economic miracle - could it last?

(For a detailed presentation visit the following: www.zealllc.com/commentary/realgold.htm and www.zealllc.com/commentary/realgold.htm)

Using the gold market chart from the high of $850.00 in 1980, one could have drawn the upper resistance channel line (downward sloping) by beginning at the double top at $711.00 in 1980, and touching the high of $499.75 in December of 1988. By extending the line further out, it becomes apparent that the price of gold continued to trade lower and below this resistance line until the first quarter of 1993 when it broke through to the upside. The lower channel line for the gold market would have been a support line extending from the low of $296.75 in June of 1982 and $284.25 in February of 1985. These two lines then would have provided the bear market channel at that time. Had the gold market truly broken the bear market cycle in 1993? Remember that K-Wave cycle analysts expected the fall season to end somewhere between 1992 and 1996. Also remember that the 4th phase of the cycle could be either deflationary which would have implied that gold should continue its decent, or inflationary which would imply that the price of gold would go higher. So what was the situation in 1993 that would cause the gold prices to break through resistance on the upside and move higher? The 1990's witnessed many interesting developments in both real interest rates and gold. In 1993, real rates plunged to zero for the first time in over a decade - the gold market responded and rallied higher as expected, as it had in the past when real rates approached zero.

At this point in 1993, the market analysts would have again looked at the gold chart in search of what may be the initial level of resistance to the upside that gold would face in the future. The three levels of resistance on the graph would have been at $413.80 (August 1990), $423.75 (February of 1990), $499.75 (December of 1987). By August of 1993, the price of gold had rallied up to $405.60 from its low of $326.10 (March of 1993) - a 24.4 percent gain and just $8.20 from the first expected level of upside resistance. During this same period real interest rates rose but were still below 1 percent. The inverse relationship between the 30-year bond and gold still appeared normal.

The price of gold then retraced (corrected) the previous move falling in price to $343.70 within a month where it found support and reversed direction to the upside. Now those analysts who understand and apply the Elliott theory would then have expected that the price of gold must rise higher than the previous high of $405.60 if indeed this was a new bull market being formed. Yet the market simply retraced the correction and then traded sideways for the next two years. During that same time period real interest rates had climbed from less than 1 percent to roughly 4.5 percent and then came back down and rested between 2.0 and 3.0 percent.

Finally in February of 1996, the price of gold spiked higher and hit $414.80 where it again meet resistance to the upside. At that time the analyst would have looked for support at approximately the $375.00 area (January - March of 1995). The analyst would have also drawn a trend support line (upward sloping) from the lows of $284.25 (February 1985) and the low of $326.10 (March of 1993). If the support line was to be broken to the downside, then it would confirm that this was not a new bull market rally. This was a critical juncture in the market.

Late in 1996 the gold price broke through the first level of support at the $375.00 area and then shortly thereafter broke through the rising support trendline indicating that this was a bull market failure and that prices were going down further. Also at this time the real interest rate began to rise climbing from a low of around 2.25 percent, eventually reaching a high of 4.0 percent in 1998. Yet even more important was the fact that in 1996, as the price of gold declined so too did the 30-year bond (less the CPI rate), which was totally contrary to past performance (Gibson's Paradox). An analyst would have expected the price of gold to rally as the 30-year declined but this was not the case. Again the question arises, was the gold market being manipulated in order to deceived investors about the truth of the US economy. If so then who was doing it and why?

Several different authors have written about the answer to that question and to again go over the details here would lengthen this presentation when not necessary. Let me just say that a group of respected people have now documented the evidence that manipulation did indeed occur apparently beginning around 1995 - 1996, and continues still today even while the GATA lawsuit is under consideration by Judge Lindsay. For those who wish to examine this closer, I suggest again you read the following article:

www.goldensextant.com/commentary18.html

Obviously the next question that the analysts were asking themselves was where would the gold market find its next level of support? Again checking the charts, the analyst would have been looking for market support to occur between the levels of $296.75 and then $284.25. In fact, the $284.25 level would have seemed as the most logical target. The reason being that the analyst would have drawn a new lower channel support line which connected the price bottoms which occurred between 1989 and 1993. Looking at the gold chart today, you will see that the market did fall to the new lower support level as early as 1998 and then continued to decline along the lower edge until July of 1999 when it broke through momentarily to the downside. (Keep in mind that during this entire period, European central banks were liquidating gold into the market which many believed was part of the gold suppression plan).

By July of 1999, with the US stock markets reaching new highs as investors continued to rush in, the gold price hit a new low of $252.80 per ounce. Then in September the European central banks announced they were capping their gold sales, and as a result gold investors immediately felt that soon the supply/demand imbalance which had now existed for many years would be recognized and the price of $252.80 would mark the bear market bottom for gold. Within 13 trading days the gold price soared from a low of $255.10 straight up cutting through the $300.00 psychological price barrier and didn't pause until October 5th when it closed at $325.50 per ounce - a 27.7% increase in days yet still below the long term upper resistance channel line extending back to 1981and crossing the high in February of 1996 at $414.80 per ounce. Analyst now were again asking if this was the first impulse wave of the new bull market, or was it another head-fake like what took place in 1993.

Again the analyst went through the same process as before examining the chart looking for levels of resistance and determining at what price level gold would need to reach in order to breakout and confirm the most recent move. Obviously those using Elliott knew that the next impulse wave would need to at a minimum rise above $325.50 to suggest this as a new bull market. The downward sloping upper resistance line was approximately $344.25 and falling about $0.05 per day. It was imperative that the gold price break through the downward sloping upper resistance trend line going back to 1980 if the bull market was to be confirmed. At that time the real interest rates were still near 3.0 percent, and the long bond had fallen below 4.0 percent. By now the DJIA have risen to over 10,000 and the NASDAQ had broken through 2,500 points. Many gold analysts felt at that time that all the conditions were in place for the stock markets to crash and gold to rally. Yet again this was not to be the case. It seemed as if the fall season would never end. In fact within the next year the NASDAQ would explode to over 5,000 points, the DJIA traded sideways between 9,500 and 11,500, and the gold market would fail to reach a new high after the correction and continued to trade lower.

Many analysts at that time were surprised by the strength of the US economy and also disappointed in the performance of the gold market considering the K-Wave fall season had gone beyond the norm, PE ratios were at historic highs, the activity of the NASDAQ was indicative of a speculative blowoff, the long term 30 year bond was still falling, and real interest rates had not increased. Yet those who understood and accepted the premise that the gold market was being manipulated for the benefit of the US stock markets were not taken by surprise. It appeared that those in power still had control over these markets and as such gold investors would have to wait a while longer once again.

But, the events which take place early in the year 2000 brings back hope to the gold market as the NASDAQ quickly reverses direction and heads south with a vengeance. Was the year 2000 to be the year for the gold investors? At this point in the presentation we still haven't determined who is right concerning the future price of the gold market. Will recent activity provide the evidence one needs to reach a valid conclusion? Part 3 will discuss the events which have taken place since 2000 and provide further insight as to what the gold market may soon do. Have we begun a new bull market or will this be another head-fake? Is it possible that the 3rd attempt by gold to break free will be the charm?