The Natural Behavioral Patterns of Economic Cycles Within the Investment Markets (Part 1)

"By the law of Periodical Repetition, everything that has happened must happen again and again and again-and not capriciously, but at regular periods, and each thing in its own period, not another's and each obeying its own law. The eclipse of the sun, the occultation of Venus, the arrival and departure of comets, the annual shower of the stars-all these things hint to us that the same Nature which delights in periodical repetition in the skies is the same Nature which orders the affairs of the earth. Let us not underrate the value of that hint." Mark Twain.

As many of you will know, I am an avid disciple of W. D. Gann. Indeed, Mr. Gann was one of the greatest proponents of financial cycles. Unfortunately he never divulged his mastery of cycles, writing, "It is not my aim to explain the cause of cycles. The general public is not ready for it and probably would not understand it or believe it." Tunnel Through the Air, P. 78

Well, I am about to share with you my discovery of secular, long term, intermediate term and short term cycles in the investment markets. I am confident that when you have concluded your reading that you will understand that all financial markets are governed by different and interrelated natural time cycles. This comprehension should enable you to make appropriate and timely investment decisions.

A. Secular Cycles

Perhaps, the most important discovery that I have made with regard to different investment market cycles is that they occur within the confines of the long wave economic cycle seasons (I have been writing about the Long Wave Cycle since 1998). Stocks, bonds, gold, commodities and real estate experience their own unique bull and bear market cycles during the seasons. Each of these seasons lasts approximately a quarter of a complete 60+ years Long Wave Cycle, or 15 to 20 years. Thus, the bull and bear market cycles, at a minimum that last a complete season (15 to 20 years), bullish or bearish, are called secular markets.

Stock markets and the gold price experience their secular bull and bear markets in opposite long wave seasons. Stock prices are bullish in the spring, the price of gold is bearish; stocks are bearish in the summer, gold is bullish; stock prices are very bullish in the autumn, the gold price is very bearish; stock prices are very bearish in the winter, the prices of gold and gold stocks are very bullish.  Stock markets and gold and gold stock prices complete two bull and two bear secular markets, opposite to each other, during one full Long Wave Cycle.

Similar to stock markets and the prices of gold and gold equities, the bond market and commodity markets experience their bull and bear secular markets opposite to each other, but unlike stock markets and the gold price, the bond market and commodities experience two consecutive bullish or bearish secular markets. This means that bonds and commodities only experience one bull and one bear market during each long wave cycle.  Bonds are bearish in the spring, commodities are bullish; bonds are very bearish in the summer, commodities are very bullish, bonds are bullish in the autumn, commodities are bearish, bonds are very bullish at least in the early winter, commodities are very bearish in winter.

Real estate is unique in that it experiences three consecutive bullish secular markets in spring, summer and autumn and one seasonal secular bear market in the winter.

These secular Bull and Bear markets are shown in the schematic below.

The best way to understand how stocks and the gold price undergo secular bull and bear markets in opposite seasons is to review the Dow Jones Industrial Average /Gold price ratio. This ratio is the value of the DJIA divided by the price of an ounce of gold. When the value of the Dow is outperforming the price of an ounce of gold, as in Spring and Autumn, the ratio will begin from a low at the beginning of the long wave season and reach a high at the end of the season. Conversely, when the price of an ounce of gold is outperforming the value of the DJIA, as in summer and winter, the ratio will move from a high value at the beginning of the season to an extreme low value at the end of the season. These extreme high or low values are indicative of a change from one season to the next.

It doesn't pay to remain bullish or bearish throughout the entire period of these secular bull and bear markets, because there will be some sizable price reversals to the secular trend. You don't want to get caught riding the trend during these reversals, which could prove costly.

How do we know when these corrections are likely to occur?  Well, I am confident that I have discovered the answer.

B. Long Term Cycles

Within the 16 to 20 year secular cycle bull and bear markets there are usually four and a half long term cycles. These long term bull/bear or bear/bull cycles generally last 4-5 years. In bullish secular markets the bullish phase of the long term cycle can be as much as 70% and the bearish phase 30% of the total time of one complete long term cycle. In bearish secular markets, the opposite is likely, with the bear portion of the long term cycle taking longer to complete than the bullish phase.

In Bullish secular markets each successive long term cycle generally makes higher high prices and higher low prices. In bearish secular markets the opposite is true, each long term cycle usually makes lower price highs and lower price lows than the previous long term cycle. The half cycle always occurs at the end of the secular bull or bear cycle. A bullish secular cycle starts from a price low and ends on a price high, which is the bullish phase of the fifth long term cycle. Since secular bull markets start from a price low, each long term cycle is measured from price low to price low.  A bearish secular cycle starts from a price high and ends on a price low, which is the bearish phase of the 5th.long term cycle. Thus, in bearish secular markets each long term cycle is measured from price high to price high.

Here's the schematic. "Ah," you say, "it's all very well to draw this pretty picture, but do market price cycles really conform to such a pattern?"  Well, they do!

In the following chart, the secular bull market of the Dow Jones Industrial Average starts from a secular bear market low of 770 points in August 1982 and is completed by the January 2000 price peak of 11,909 points. Because we are studying a secular bull market, long term cycle markets are measured from bear market low to bear market low. Each successive long term cycle makes a higher high price and a higher low price than the preceding long term cycle. The second cycle last only three years, but the average length for the four complete cycles is 4.25 years. The price peak at the top of the bullish phase of the fifth long term cycle in January 2000 completes the DJIA secular bull market.

This huge autumn secular stock bull market 1982-2000 saw the Dow Jones Industrials Average gain a little more than 1,500%.

Now, let's examine the secular gold price bear market that occurred over approximately the same period as did the autumn stock secular bull market, which we have just reviewed.

The price of gold bullion reached its secular bull market peak (1966-1980) at $850.00 (U.S.) per ounce in January 1980 at the end of the long wave cycle summer.  From that point, the price of gold began its autumn secular bear market which lasted until July 1999, when the price reached a low of $253.00 (U.S.) per ounce. Since the secular bear market started from a price high, January 1980- $850.00 (U.S.), the long term cycles are measured from high price to high price. These four long term cycles average just over 4 years. The conclusion of the secular bear market was reached at the bottom of the half cycle in July 1999 when the price of gold reached $253.00 (U.S.) per ounce. The entire 1980 to 1999 secular bear market amounted to a 70% loss in the price of gold bullion.   

On Page 3, I have shown a chart of the Dow/Gold ratio going back to 1896, which was used to demonstrate that a secular bull market in stocks is always accompanied by a secular bear market in the price of gold as in the Long Wave Cycle spring 1949-1966 and autumn 1982-2000. Conversely, a secular bear market in stocks is always accompanied by a secular bull market in gold as in summer 1966-1980 and winter 2000-2020?

We will examine the chart of this ratio from the start of the current secular bear market, which occurred at the end of the long wave cycle autumn in July 1999, when the ratio reached a record price peak of 44.79. (It required the price of 44.79 ounces of gold to buy the value of the Dow Jones Industrial Average). The following chart shows three completed long term cycles and a half complete cycle with the bear portion of the long term cycle (approximately 2 -2.5 years) still to unfold.

We know that during secular bear markets, each long term cycle invariably makes lower high prices and lower low prices than the previous cycle. That is clearly evident in this chart. Thus, we can anticipate that the developing long term cycle low will make a value lower than the previous long term cycle low (5.78 -22 Aug 2011). With this in mind we should be able to predict with a fair degree of accuracy what this low might be.

 I have calculated the percentage difference between the lowest value in long term cycle 1, 20.90, and the lowest value in long term cycle 2, 11.12; the difference between the two is 53%. Then, I have calculated the percentage difference between the low value of 11.12 made in long term cycle 2 and the low value 5.78 attained at the end of the bear phase in long term cycle 3. This amounts to a 52% difference. The percentage differences are remarkably similar and the average of the two is 52.5%. Thus, the projected ratio low for the end of the bear phase in long term cycle 4, which is anticipated to occur in early 2017, is 3/1 (52.5% X 5.78).

We can perform a similar exercise to determine what might be the price of gold at the end of the bullish phase of the 4th Long Term cycle, which commenced from the 3rd cycle ending low at the end of June 2013.

Shown below is a monthly spot gold price chart depicting the onset of the secular bull market, starting from the secular gold bear market low price of $251.70 (U.S.) in August 1999. There are three complete long term cycles within the ongoing gold secular bull market with the bullish phase of the 4th long term cycle having just started.

Monthly Price Chart-Spot Gold Price

Chart-Thomson Reuters

The first long term cycle started at the same time and price as the start of the secular bull market following the end of the gold secular bear market in August 1999. In that month the price of gold reached a secular bear market low of $251.70 (U.S.).  The price of gold reached the 1st bull phase peak in January 2004 at $430.50 (U.S.), which is 71% above $251.70 (U.S.). The bear phase, which completed the first long term cycle lasted into May 2004 with the price of gold making its 1st. long term cycle bear phase low of $371.00 (U.S.); 14% below the long term cycle high price.

The 2nd. long term cycle commenced from the 1st. long term cycle ending price low of $371.00 (U.S.) in May 2004. The bullish phase peak of the cycle was reached when the price of gold reached $1,030.30 (U.S.) in May 2008. The percentage gain from low price to high price amounted to 178%. The bear phase of the 2nd long term cycle was completed in October 2008 when the price of gold reached $680.80 (U.S.), which was 34% below the cycle high price.

The 3rd. long term cycle started from the 2nd. long term bear market phase price low of $680.80 (U.S.), which was reached in October 2008. The price peak ending the bullish phase of the 3rd. long term cycle attained $1,920.30 (U.S.) in September 2011. This amounted to a percentage price gain of 182%, which was virtually the same percentage price gain experienced during the bullish phase of the 2nd. long term cycle. The completion of the bearish phase of the 3rd. cycle was reached at a gold price low of $1,181.48 (U.S.) in June 2013. This amounted to a 38% fall in prices from the 3rd. long term cycle bull market price peak.

The 4th. long term cycle commenced in June 2013 from the bear market low of $1,181.48 (U.S.), which ended the 3rd. long term cycle.

To project the gold price at the end of the bullish phase of the 4th. long term cycle, I will use the average of the percentage gains from low to high in the second cycle and low to high in the third long term cycle. I have done this because these two percentages are almost equal to one another, and there is generally symmetry in cycles. The percentage gain from low to high in the 2nd. long term cycle was 178% and the percentage gain in the 3rd. long term cycle was 182%. The projected gain for this bullish phase of the 4th. long term cycle is the average of these two gains or 180%. Thus, the projected high for the 4th. long term cycle is $1,181.41 (U.S.) plus $2,225 (U.S.) (180% of $1,181.41) = $3,306.00 (U.S.).

The projected gold price high of $3,300 (U.S.) should be attained sometime in early 2017. Since we have projected a Dow/Gold ratio of 3 by approximately early 2017 and a gold price of $3,300.00 (U.S.) per ounce by about the same time we can project that the DJIA will be of 9.900 points at that time (The Dow/Gold ratio of 3/1, X the price of gold -$3,300.00 (U.S.) per equals 9,900 DJIA points). We are not that confident in that prediction and later we will tell you why that is so.

It will be interesting to see how the price of gold shares will respond to this $3,300.00 (U.S.) projected price of gold. With this in mind, we will evaluate the chart of the HUI (Gold Bugs) Index.

HUI Gold Bugs Index Monthly Chart

Thomson Reuters

The secular bull market for gold shares, here identified by the HUI, Gold Bugs Index, started from a secular bear market low in May 2000 at $35.51. This, too, was the commencement of the 1st. long term cycle.

The 1st. long term cycle high price was reached in December 2003 at $258.60 (U.S.) and the conclusion of the 1st. long term cycle was reached in May 2005 when the HUI price reached a price low of $165.71.

The 2nd. long term cycle started from the first cycle low of $165.71 in May 2005. The long term cycle high was reached in March 2008 with the HUI priced at $519.68. The cycle low occurred in October 2008 at a price of $150.27, which was during the height of the financial crisis, and as a result lower than the 1st. cycle low.

The 3rd. long term cycle started from the low of the 2nd long term cycle ($150.27) and reached the cycle peak in September 2011 at $639.59 (U.S.). the 3rd. long term cycle was completed in June 2013, when the HUI reached a price low of $206.68.

Unfortunately, there is very little symmetry in the HUI price action between the long term cycles high and low prices. This makes it virtually impossible to project a continuation of a price pattern that has been established in the previous three long term cycles.

So, what I have done in this case is to establish the price relationship between the price of Gold and the HUI in each of the three preceding the Long Wave Cycle peaks. In Cycle 1 In January 2004 the price of gold peaked at $430.50 (U.S.) and the HUI value at that time was 258, which amounted to 60% of the value of the gold price.  In the 2nd. long term cycle the price of gold peaked at $1,030.80 (U.S.) in March 2008 and the value of the HUI at that time was 519.68, which amounted to 50% of the price of gold. In the 3rd. Long Wave Cycle the price of gold reached its cycle high peak in September 2011 at $1,920.30 (U.S.). The value of the HUI peaked in the same month at 638.59, which is equal to 30% of the price of gold.

Thus I have, conservatively, reckoned that the value of the HUI at the end of the bullish phase of the 4th. Long Term Cycle will be 30% (The lowest of the three percentage differences) that of the price of gold ($3,300 U.S.) or 990 points, which is equal to an increase of 55% over the 3rd. Long Term Cycle high of $639.59.

We have demonstrated, I hope convincingly, that the various secular investment cycles, lasting approximately 18 -20 years start and end in conjunction with the long wave seasons. Within these secular long wave seasonal bull or bear markets there are four and a half long term cycles lasting approximately four to five years for each complete cycle and half that time for the final half cycle.

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