1980 to 2007: From bear to bull: the multi-year trends and the long-term picture
The chart above clearly shows one thing: long-term trends often last many years. The bear market that started in 1988 ended in 1993. The up-swing that followed lasted three years from 1993 until 1996 and culminated in what may be called a false break-out. Then another bear-market unfolded taking the gold price down to $ 250 over a period of almost four years.
Then the spike in the gold price (1999) came as a consequence of the central banks’ announcement that they would be limiting their gold-sales.
The 1999 bottom was tested again at the beginning of 2001. At that time, when few believed that any money should be put into precious metals, the present bull market started; a bull market we deem has still a long way to go.
In January 2006, the gold price started to accelerate and by May reached levels few believed possible only a few months before. Too much enthusiasm was building up and the question was: “How much is too much?” -While short-term charts show a lengthy consolidation (15 months), which cause short-term-minded speculators to despair, the long-term up-trends remain well entrenched. The resistance levels shown above will eventually be broken which will open the doors to much higher prices.
The medium-term picture
From the above presentation, it is easy to see that there have been many buying opportunities since this bull market started in 2001, along with some excellent prospects for selling. Each time the gold price fell back to or below the EMA 50 (green line) we would have been well advised if we had bought.
On the other side, taking profit would have worked well each time the gold price moved to a level of close to 20% above the EMA 50 – except at the end of 2005 where we would have missed the price surge from 525 to 720 (+37%).
It is quite fascinating to note that the gold price has fallen several times to the level of $ 650 or slightly below since the start of the year and that each time strong buying lifted it back towards the $ 700 level. At the beginning of July and again during the week of August 13, the gold price fell to $ 648 just above the EMA 50 where it stopped and turned around.
Comparing the recent trading pattern with the one of 2005, we would not be surprised if the price of gold jumped over the resistance level of $ 700/720 towards new high ground.
At this junction, it can be helpful to see how unhedged gold stocks fared compared to gold:
The price of gold increased close to 200% since the start of the bull market in the year 2000. The HUI-Gold Bugs Index surged however 1,000% from its low to the high it reached at 401.69 points in May of last year.
Higher percentage gains for the gold shares relative to the price of gold imply a higher volatility which means that corrections are also more severe when the price of gold corrects. This however should not concern us unduly as gold shares make up for any losses suffered very quickly once the gold price starts firming again.
From its July high of 372 points the HUI-Index lost 23% to its August low but has already recovered 14% by the end of last week and could reach the July high again by the end of this month.
The short-term picture
Since the start of 2006, the HUI-Index has traded between SUPPORT and RESISTANCE as shown in the chart below. It is in fact remarkable how around the support level of 270 regularly enough buying power comes forward to push the price of gold back towards resistance. The resistance level around 370 on the other side provoked enough selling to impede the move towards higher territory – for the time being.
We believe nevertheless that it will be a matter of time that this resistance level will be superseded which will open the door towards substantially higher gold prices. The longer it takes, the stronger the move will be.
The US-Dollar
“Contrarians” may feel comfortable predicting a stronger US dollar which, by the way they have been doing for months. We prefer to hold on to our negative view unless clear sings emerge that fortunes have turned in favour of this US dollar.
The trend is clearly down as no one will dispute. But every trend will bend at some time and what happened at the beginning of 2005 could also unfold now. But there is now no technical evidence for this.
Central banks do what is in their power to calm markets. A collapse of the US dollars is in nobody’s interest. Therefore they will try to get an orderly devaluation over time - but devaluation in any case.
Those who believe that a “promise to pay”, written on a piece of paper by a central bank is as good as gold, will some time in the future have an unpleasant surprise.
Try to cash a Swiss bank note issued before 1980 at the Swiss National Bank and you will be told: “This is not even worth the paper the promise is printed on!”
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but may no longer be pertinent at the time of reading.
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