Gold And The 120-Year Cycle Bottom

Trading volume across all exchanges has been muted lately due to the holidays.  Traders are still mostly on vacation which has produced low volatility and a lack of excitement.  Not much is going on in the news front, either.

There was one news headline recently that was quite conspicuous, however.  A news site known as the Deccan Chronicle published a story on Dec. 25 entitled, “Lift of import curbs may crash gold prices.”  The story was in reference to the Indian government’s proposal to relax import duties on gold.  Dharmesh Bhatia, of  Kotak Commodities Services Ltd., was quoted in the article as predicting a gold price crash if the Indian government removes the duties on gold imports or even relaxes the curbs significantly. 

Mr Bhatia said that Barclays Bank had stated that commodity-linked investment funds are headed for record outflows in 2013 and between November 2012 to November 2013, there has been a $88 billion decline in assets under management.  The article stated that investors had withdrawn $36.6 billion from commodity funds during this period due to the decline in prices of sugar, coffee, nickel, gold, silver, and other resources.  By far the biggest decline, however, was witnessed in gold, with a 29 per cent crash after a rise over nearly 11 years.  EPFR global estimated that investors have withdrawn $38.8 billion investments from gold funds alone.

“While there is no indication that government is in any hurry to left the ban on gold imports,” the Deccan Chronicle reports, “there has been a demand from the Union commerce and industry minister Anand Sharma for relaxing the curbs on gold imports.  Even the Reserve Bank of India governor Raghuram Rajan is of the view that if curbs on gold imports continue.  It would incentivize smuggling.”

Experienced investors know that when the word “crash” appears in a headline it typically carries a contrarian implication.  It should further come as no surprise that this highly charged emotional word is prominent after a stock or commodity has experienced a steep decline.  Could the appearance of a crash warning for gold signal the metal’s imminent reversal?  Perhaps, although a more likely interpretation is that gold has reached – or nearly reached – a temporarily “oversold” technical condition and is primed for at least a short-term technical rally. 

We still need to see gold close at least two days higher above its 15-day moving average, and for the 15-day MA to turn up.  This will provide the technical context for an immediate-term bottom and short-covering rally based on our technical discipline.  A corresponding decline in the U.S. dollar index would increase the likelihood that an immediate-term breakout signal in gold won’t prove to be a false signal.  For now the immediate-term trend for gold remains down as defined by the position of gold’s price line to the 15-day moving average (see chart below). 

Wall Street’s reaction to the Fed’s taper announcement at its December meeting was interpreted by many as a vote of confidence for the U.S. economy.  The resulting rally in stocks and subsequent decline of gold’s value would seem to justify this view.  As I’ve argued in these pages, what’s good for stocks is bad for gold and until something comes along to upset investor confidence in the economic and/or stock market outlook the bear market in gold is likely to continue. 

Gold is in need of a catalyst to launch a revival of its fortunes.  The year 2014 is the best bet for such a revival due to the influence of the major long-term yearly cycles scheduled to bottom later next year.  A return of broad market volatility and global economic uncertainty would be the most likely candidates.  

Speaking of the long-term cycles, a reader shared with me the following scenario: “Could it be that the gold and precious metals markets are reflecting the hard done phase of the Kress cycles?  The action in gold the past few years is certainly consistent with what one might expect in the final sharp decline of the long term cycles.  In fact, the action of silver might have been the best harbinger of the concomitant decline in the fall of the middle class over the second thirty year period. 

“As you know, silver peaked in 1980 around $50/oz fairly close to the peak of the first half of the 60 year cycle.  Setting up the hard down phase in the Kress cycles in 2011, silver failed to take out its 1980 high just under the $50/oz level. The middle class was teased, with silver flirting with its 1980 high, camouflaging the massive decline in purchasing power the last 30 years has wrought.  Furthermore, the collapse in the silver price since 2011 has the potential on an inflation adjusted basis to challenge the 89% stock market decline witnessed during the early stage of the Great Depression. 

“It might be that this time the 120 year cycle bottom coincides with the bottom in the precious metals bear cycle.  Perhaps the stock market does not have a harsh decline until interest rates accelerate higher with the initial lift from a new 120 year cycle?”

My answer: This is thought provoking, and perhaps you’re right that gold/silver will bottom out, long-term, in late 2014 with the 120-year cycle.  As far as gold and silver bearing the brunt of the cycle, I’m not so sure.  The Kress cycles are primarily equity cycles and secondarily economic cycles.  I don’t think Mr. Kress would have agreed gold and silver are primary recipients of the final “hard down” phase.  Considering that gold is inflation/deflation sensitive, however, it’s likely that the metals are experiencing a spillover effect from the cycles, however.  

The main effects of the deflationary cycle, IMO, can be seen in the economic numbers: despite record levels of liquidity generated by the Fed since 2008, unemployment has dropped only slightly and inflation remains below 2%.  What else other than the 120-year cycle of inflation/deflation can explain this?

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