Is Gold Disappearing from the Streets and Going Back to the Vaults?

25 October 2009

As I have recently posted, I have been visiting the Seeking Alpha site in order to find up-to-date investment market news and more intelligent than average reader commentary.

A couple of interesting ideas came up while I was reading Andrew Butter's article, "Roubini Hates Gold: Is He Wrong Again?"

Briefly, Mr. Butter reprises Nouriel Roubini's recent arguments against gold's currently rising price. Mr Roubini stated (wrongly in my view):

"I don’t believe in gold. Gold can go up for only two reasons. [One is] inflation, and we are in a world where there are massive amounts of deflation because of a glut of capacity, and demand is weak, and there’s slack in the labor markets with unemployment peeking above 10 percent in all the advanced economies. So there’s no inflation, and there’s not going to be for the time being.

"The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression. But we’ve avoided that tail risk as well. So all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense. Without inflation, or without a depression, there’s nowhere for gold to go. Yeah, it can go above $1,000, but it can’t move up 20-30 percent unless we end up in a world of inflation or another depression. I don’t see either of those being likely for the time being. Maybe three or four years from now, yes. But not anytime soon."

Mr. Butter was also, in my opinion, off-base in his critique, stating the following:

"I don’t exactly agree with Roubini, although I agree with him on deflation, just I don’t buy the idea that it’s inflation (in particular) that drives gold prices; but I agree with his conclusion, and it’s good to know that there is at least one other person in the world who doesn’t buy the idea of gold breaking out and heading towards heaven (I was getting pretty lonely actually).

"I think that gold is a bubble fuelled by excess liquidity and wonky valuations that you tend to get at the top of every bubble (remember the weird explanations of how to value a dot.com stock at the top of that bubble).

"The latest I heard is that it’s all about lack of confidence in government. Well, the peak of that 'lack of confidence' was February/March 2009; and what happened to gold then? It dropped.

"The best predictor of the gold price since 1971 was the price of oil (74% R-Squared on an annual basis), and by that measure at $75 a barrel the price of gold should be $750, which means now it’s a bubble, which means if it comes down and oil doesn’t go up, then it could drop to $600."

While I disagree with both Mr. Roubini's and Mr. Butter's primary theses, I was struck by the number of insightful comments by readers in response to Mr. Butter's article. Many commenters were not taken in by the above (spurious) arguments. And one post in particular set my thoughts meandering down a new path.

In this comment, "manya05" (I'm not sure why people don't use their actual names in making internet posts, but what do I know of young folks' behaviour these days?) stated:

"Roubini gives two scenarios in which gold can move up and discounts them both, and maybe he is right. But he forgot a third possible reason giving force to a move up in gold. Most central banks around the world (big and small) are trying to figure out how to 'de-dollarize' their reserves. They are diversifying as best they can, I am sure they are converting dollars to other currencies, but ultimately they realize that holding reserves in the currency of another government is not a wise idea...whatever the currency. So, what are they going to keep as reserves? Amphorae of olive oil and bags of grain like in the old days? I don't think so, if gold worked as a good store of value for 1000s of years, for the short term, it is the obvious route for central banks to take. So I think Roubini is wrong, gold is disappearing from the streets and going back to the vaults, and that will keep the price supported, and possibly even drive it higher. Until central banks regain confidence in a currency, any currency, gold is not going down."

It was the vision of gold's "disappearing from the streets" that captured my imagination - though I mean this neither positively nor negatively. It is an implication of the current gold bull market that I had not so far contemplated.

For example, we often speak of gold as "an alternative currency." Well, what kind of currency would "disappear from the streets?" It is a mental puzzle... a conundrum... a koan if you will.

But I think manya05 may be onto something? If he or she is right, then gold will continue to function more as a store of value (something for the vaults) rather than as a currency (a publicly-accessible and widely distributed medium of exchange). My instincts tell me that manya05 is likely to be proven correct.

Think about it... if gold moves over the coming years into the thousands of dollars per ounce, as I think it inevitably will, are you going to feel comfortable stuffing a gold coin or bullion bar into your pocket and walking down the street? I don't think so. Gold will be storing too much value per ounce to function as a public unit of exchange.

Far more likely, gold will be consigned to the vault, as well as be subject to rising security concerns. It will remain a store of value, but it will not function as a currency on any broad basis. I certainly don't rule out gold certificates (exchangeable for gold), though even here, I suspect that most gold certificates will be electronic, and subject to electronic security measures, rather than physical.

Hmmm? And what will become of jewellery stores? There will be changes here too, at a minimum, increased security measures in jewellery stores.

I shall leave further speculation on this subject to the fertile minds of my readers. In the interim, here is my own reply (slightly edited) to Mr. Butter's article:

While I find much with which to agree and disagree, I appreciate the general level of intelligence of the commentary at this site. I have read every comment on this article, for example, because I was able to learn by doing so. Few other sites offer much more than rude, emotive or reflexive commentary, so it is refreshing to visit Seeking Alpha (I would appreciate less rudeness, even here, however).

I entered the market in precious metal mining shares when gold was at $330 in 2003 - and wish now that I had been there at $250, whether in 1999 or 2001. I have made a mix of good and bad short-term calls, but my long-term perspective on the gold market has never proven wrong.

The gold price is driven by increases in the money supply, a phenomenon which is pervading every major global currency - including the good ones, such as the Yuan.

I wish it were more complicated than that, but it's not. Monetary inflation (increases in the money supply) is what causes the rising gold price.

That trend has much longer to run, particularly when one considers John Williams' consistently calculated inflation numbers, which place briefly peaking 1980 gold at the $6000 US level. By no indicator of which I am aware is gold anywhere near a bubble, though of course as a contrarian I shouldn't be letting that cat out of the bag!

In fact, every metric and leading indicator that I follow telegraphs that the current gold price breakout is in its infancy.

Does Roubini understand inflation and deflation? I don't think so. At this time, the big banks (who by the way are the primary shorts in COMEX gold - and thus again wasting taxpayer dollars to bet against the barbaric relic) are playing Fed loans against the treasury market for modest gains on their federally-donated, taxpayer-funded, dollar handouts, rather than taking on additional risk in consumer or commercial loans.

Thus our newly-minted electronic Federal Reserve Notes are not being leveraged into the broader economy - at this point.

It is exactly true that necessities are escalating in price, while discretionary items (let's include the overbuilt real estate market in the latter category) are languishing on the shelves. But that phenomenon is only for here and now.

Our present economy is inflationary, plain and simple. The money supply dam is bursting, and the new dollars will inevitably wend their way through the cracks in the dams of our economic institutions, creating inflation in places that we do and do not expect.

Now, could the entire house of cards collapse in the face of such unprecedented international money printing? I suppose this is still possible. That is, printed Greenspan-Bernanke dollars can be neutralized by being mismanaged, as has already been proven. It's just that the Fed would rather create a new Zimbabwe than see that happen.

As to the correlation of the nominal prices of gold and oil, as I was taught in statistics 101, correlations do not demonstrate cause and effect relationships.

That is, both the gold and oil price are derivative phenomena, of which the primary drivers are (1) the unprecedented increase in the global money supply (pick a currency - any currency), (2) the finite nature of gold and oil supplies, and (3) the utility of both gold and oil.

I have intentionally referred to the utility of gold, as this obvious fact is so often misunderstood in various articles and commentaries.

What is gold good for? It holds one heck of a lot of value in irreproducible form in a very small space. It is a combination of protons, neutrons and electrons that is rare in nature, appealing to the eye, physically dense and compact, industrially useful (just expensive for its most obvious applications), and, above all, historically validated over millennia in diverse human cultures spanning the globe.

That is, currencies have always served as media of exchange, and gold has the most desirable combination of characteristics of any currency on the planet, as has been the case from the dawn of human civilization.

As manya05 stated, "gold is disappearing from the streets and going back to the vaults, and that will keep the price supported, and possibly even drive it higher."

I had not previously meditated on the notion that gold is likely to "disappear" from the streets. Manya05 may have a point here. I'm not sure what will happen to the jewellery stores, but of this I am certain - it is gold in the vaults that is driving the current gold bull market.

I guess perhaps gold could disappear from the streets - and perhaps it will soon enough grow dangerous to carry it visibly on the streets as well (let's not forget what happened to copper pipes in 2007-08!). The demand for gold will be stronger than that for copper, this is certain.

To conclude, is Mr. Roubini wrong to despise gold, at least at this time?

I'd say that at a minimum, he has not yet captured the timing of the gold market. Gold's day is not 3-4 years away. It is today.

Is Mr. Butter correct that gold is "a bubble fuelled by excess valuations?"

At some future point this statement will inevitably prove accurate - yes, the gold bull market will end in a bubble. But there is not a single indicator that gold is in a bubble today. No, not one.

So as to Mr. Butter's and Mr. Roubini's primary points, both may at some future point be proven correct, but neither has accurately characterized today's gold market (which will continue in a strong rise here and now)."

For my other comments on Seeking Alpha, click here.
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Why Bull Markets Repel Most Investors

22 October 2009

It's no secret that most investors - including "trained" professionals - miss most bull markets.

If you've ever observed the bull riders at a rodeo, this will give you a pretty good idea of why we call them bull markets. They buck and kick to throw their riders off, and then they trample them underfoot.

I hear some readers asking, "Why are you saying this? Don't bull markets rise by definition?"

Yes, of course they do, but as has often been observed, bull markets inevitably "climb a wall of worry."

By way of contrast, bear markets - those in decline - drift down in a miasma of complacency. This dominant mood of bear market complacency, in turn, is punctuated by episodes of panic, which are then relieved by "dead cat bounces." These often lengthy "bounces" reassure present holders to stay the course, and lure holdouts to jump back in.

For our instruction, the "SPTGD" Toronto gold index is presently offering a textbook example of the kind of psychological angst that characterizes bull markets. Note the quick run-ups in the very first days of September and October 2009, followed by a relentless downward drift in each case. Note also the lower high in October, compared to the early September high. That is, if you had "known" what the market was going to do, you could have bought at the September 1, 2009 low, and sold at the September 4, 2009 intraday high - and you'd still be substantially better off than if you had held from September 1 through to the present.

Unlike bear market declines, where rare but rapid downward moves are "cascading" or "waterfall" like, bull market declines are lengthy, persistent, and at the end often harrowing, though usually in accord with a well-defined "declining wedge" pattern. The declining wedge may run sideways, as was recently seen in iShares Gold Trust (GLD), just prior to the September 2, 2009 upside breakout in the gold price:

Or the wedge may run relentlessly downwards, as illustrated by this classic 1998-99 chart of Freeport-McMoran Copper and Gold (FCX), which occurred at the first "bottom" point of the 1999-2001 "double bottom," which in turn concluded the 21-year bear market in gold and commodities (including copper), which had persisted from 1980-2001:

As a point of interest, declining or "falling" wedges are paradoxically more bullish than ascending wedges, as can be seen in this illustration of Ann Taylor Stores' stock price in 1999. Note that today, 10 years later, this great company's stock is presently trading in a lower range than it did in 1999, though Ann Taylor Stores eventually recovered from its 1999-2000 decline to rise as high as $45.15 in 2006:

Let us direct further attention to the market's present behaviour. On Wednesday, September 2, 2009, gold broke out of its previous trading range, quickly ascending to new highs, and then moving on to its current record highs, as can be seen below:

Take into consideration that the record highs are so far only in US dollars, as Canadian dollar gold peaked at $1258 in February of this year (and I certainly expect Canadian dollar gold to leave the $1258 level behind before too many more months have gone by)....

A close-up view of Canadian dollar gold over the past 3 months follows. Consider that while there have been no dramatic gains over this period, we also saw an early September jump in the Canadian dollar gold price, and Canadian dollar gold has been doing "just fine" ever since:

That is, we Canadians had our dramatic run-up in the November 2008 - February 2009 period, and have only been "marking time" since:

How has the SPTGD Toronto gold index responded to strength in the gold price in most world currencies?

Ignoring gold's record February 2009 Canadian dollar high, this ornery bull followed suit, also moving to new highs (but not record highs) on about the same dates as did US dollar and Canadian dollar gold.

How has the SPTGD index fared since its September 2, 2009 ascension?

Aye, there's the rub....

A close analysis shows that in the past 30 trading days, we have seen 5 good days and 25 "bad" days. By good days, I refer to the black-outlined bars filled with white, moving with two or more rising days in succession. These benign "white" bars show the SPTGD index starting out at a lower point, and rising to a significantly higher point for the day on more than one day.

Though the SPTGD index moved higher on some of the other days, these were ambiguous days, for example, starting at new highs, but then falling for the day, or oscillating throughout the day with no appreciable change. Perhaps there was a single "good" day, but sandwiched between "bad" days.

Yes, with gold in US dollars at record highs, the SPTGD index of Canadian gold mining shares has so far managed a measly 5 unambiguously positive trading days since September 2!

This is what the old-timers call "rebalancing sentiment."

In fact, the SPTGD index has climbed from below the 310 level on September 1 to the 337 level as I write. This is a respectable 9% gain over 30 trading days. Ask anyone, "If your portfolio gained 9% every 30 trading days, how would you feel?" Most of us would be pleased, as this would produce cumulative returns of about 60% per year (or roughly 90% per year if the returns were compounded)!

By the way, what appears to be going on in the gold market technically is an "ascending double bottom" in the gold stocks (2001, 2008), lagging gold's 1999-2001 double bottom by 7 years! Here is the long term gold chart, with the obvious double bottom in 1999-2001:

And here is the only long-term chart for gold stocks available on Stockcharts.com, the Philadelphia Gold and Silver Index (XAU):

Note the contrasts: (1) gold's double bottom is "flat," (2) gold's bottom occurred two years earlier than the bottom in gold shares, (3) the second bottom in gold shares has lagged that in gold by 7 years, and (4) the second bottom in gold shares is a higher bottom (a bullish indicator).

So where are we in gold shares? I think it is obvious to see that the pattern in gold shares is "very big," and that we are only just now getting started! This is particularly true in Canada, as our second bottom in gold stocks (see long-term SPTGD chart further above) was more severe, due to the ascending Canadian dollar.

The SPTGD index was priced at 151.52 in 2008 versus 83.97 in 2000, much weaker than the US-based HUI index of unhedged gold miners, which bottomed at 35.31 in 2000 versus a healthier low of 150.27 in 2008.

I have long adhered to Jim Sinclair's prediction, that the Canadian dollar is headed for about US $1.25. But in the bigger scheme of things, we are now most of the way there....

I trust it is now obvious that the problem with bull market advances lies in how their gains occur. Long-term secular bull markets advance in such a way as to raise and then crush hope - repeatedly! This reliable bull market pattern discourages the uncommitted, and fails to attract the disinterested and the timid.

Emotionally, the bull market investing experience is briefly wildly euphoric, and then, more or less in succession: unsettling, discouraging, distasteful, deadening, sometimes boring, and at certain points sickening.... Until it... unexpectedly... happens all over again.

In short, it takes an iron stomach, and pretty decent abdominal strength, flexibility and coordination, to ride a bull.

My advice... ride it anyway. Don't be seduced by the broad bear market in general equities, which has nowhere in particular to go for probably another decade. Ride the bull market in gold (including precious metals and precious metal mining stocks) for ultimately satisfying returns. But... expect to be unsettled - perhaps most of the time - along the way.

As I'm sure they also say of bull riding at the rodeo grounds, bull market investing is an unusual kind of fun!

(Special thanks to Bryan Eubanks in San Diego for this last image. I hope that readers will be reassured to know that he escaped serious injury!)
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Canadian Energy Trusts Slipping out of Canadian Hands

31 October 2007, updated 5 June 2008 & 22 October 2009

Today (October 31, 2007) is the anniversary of the day that Jim Flaherty, Canada's nominally conservative finance minister, destroyed Canada’s energy income trust sector by dismantling the income trust structure that had kept the majority of Canada’s stable natural gas and oil properties in Canadian hands.


News of foreign takeovers is swirling, and much more is likely still to come.

The market capitalization of the trusts has been cut in half, severely injuring the (mostly Canadian) investors who held these equities in good faith. With their reduced market value, these properties are ripe for takeover by moneyed foreign and corporate interests who are willing and able to wait the several years that may be required for natural gas assets to join the parade of other commodities in the present skyward move that is sweeping the natural resources sector.

Why is natural gas so slow to gain in value relative to other commodities?

The answer is easy. Oil only occurs geologically at very specific depths. If it is deposited in a location that is too deep or too hot, oil breaks down chemically to form natural gas. Thus, when drills go into the ground, natural gas is found much more easily than oil. As oil is easy to transport and use, and natural gas is difficult to transport and use, energy explorers continue to focus on oil, producing natural gas primarily as a byproduct.

This will change – and the change is coming soon. Why?

Natural gas is a better quality fuel than oil. It burns cleaner, with fewer carbon emissions. Natural gas is now being allocated increasingly (and massively) to oil sands production. In my view, this is probably a mistake, as we are burning clean natural gas in order to produce dirty and heavy oil from the Alberta oil sands.

All – yes – every bit – of Alberta’s (and British Columbia's) natural gas will be long gone before the oil sands can be converted to oil. It takes massive amounts of natural gas to produce oil from the sands, and all of it will be gone with only half of Alberta’s oil sands reserves in production. At present, natural gas is in surplus, keeping prices low, and keeping consumers happy. But the escalating demand for natural gas for oil sands development, as well as increased substitute use of natural gas as oil prices rise, will soon result in much more expensive natural gas.


The question is – thanks to Mr. Flaherty's narrowly-conceived, interventionist and socialistic initiative – will there be any natural gas left in Canadian hands when the price of natural gas begins to soar as a result of his short-sighted policies?

I fear that the answer will be no – and Mr. Flaherty, and his band of purported Conservatives in Ottawa – will be the ones to blame – though by that time, his role in the causation of the collapse of Canada’s energy income trusts will probably have been forgotten by a public unacquainted with history.

My advice – ask Mr. Flaherty this question now – as he offers the tax money he has seized from the energy income trusts to Canadians in his current giveaway pre-election federal budget.

My message to Mr. Flaherty and Stephen Harper’s so-called Conservatives?

I will not vote for any member of your party, or anyone associated with your party, until you straighten this one out.

Period.

Say no to the Conservative Party of Canada until they restore Canada’s income trusts to their former status (petition here).

Click here for "Mad as Hell Canada" (highly recommended).

Click here to send your message to any MP in Canada.

5 June 2008: Diane Francis of the National Post has written the ultimate critique of Mr. Flaherty's flawed and confiscatory income trust policy. Not only does Mr. Flaherty's about-face on this innovative Canadian investment vehicle fail to recover tax revenues, it in fact transfers the tax benefits from Canadian taxpayers to the large-scale international equity market, removing Canadian assets from Canadian hands, while also punishing Canadians for investing in Canadian assets (to the tune of $35 billion). As of December 9, 2007, 40 of the original 259 Canadian Income Trusts had already been dismantled. As Francis makes clear, the parties who have taken over these prize Canadian assets will be using the former (taxable) dividend stream to pay off their tax-exempt loans to make these acquisitions. This is the single worst federal fiscal policy ever formulated in Canada. Read Ms. Francis' incisive critique here. Click here for the post mortem on already deceased income trusts.

Click here for my recent study of the natural gas demands of Canada's booming oil sands.

22 October 2009: One of Canada's best energy trusts - Harvest Energy Trust - has now slipped out of Canadian hands. (It is being purchased by the Korean National Oil Company.) Jim Flaherty gutted the company by removing the tax protection that had made investment in marginal energy resources profitable. Small Canadian investors will no longer have the option of owning a stake in this invaluable Canadian-based resource company. The taxable distributions ($2.7195 billion over the past 5 years) taken from capital as well as from cash flow will no longer feed into Canadian Federal and Provincial tax revenues. Jim Flaherty's, Stephen Harper's and Mark Carney's attack on small Canadian investors continues.
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Gold Tsunami VI: Looking for Patterns in Gold Price Advances

9 October 2009

It has often been said that history doesn’t repeat, it rhymes. In order to understand the present gold breakout rally, I've been looking back to previous rallies in the gold market.

Let’s work backwards from the present, and examine some charts.

Gold last broke out (attained a new high price) in September 2007. We'll begin by considering what it did then.

Note that the barbaric relic (this term was used by the economist John Maynard Keynes to refer to the golden metal a century or so ago) ran up almost continuously from September 1 through November 11, 2007.

The November 12-19 pullback took away 8% from the November 7 top. However, this steepest pullback only reached the level of October 28. That is, the gains of the first 2 months were preserved. It then took the second half of December (2007) to move on from the October 28 price level, and of course by March of 2008, $1000 had been exceeded, for a 50% gain.

Now look at the same period in 2005 (another bull run). Here you see a flatter takeoff, with September being all positive, October slightly negative, and then November 7 – December 12 being the primary period of strength. Despite the flat start, this rally was ultimately stronger than that of 2007 in percentage terms, as gold advanced almost 65% from the breakout point to $730, and later in the following year, in May 2006.

There are a couple of lessons I draw from these charts.

1. You can have some strong runs that last weeks to months without a significant pullback, just grinding up week by week if not day by day.

2. The long, multi-week or multi-month runs have stronger pullbacks when they finally end, as if the corrective forces are on hold, and have to make up for lost time when they re-emerge.

Obviously the long runs upward smoke out the short sellers, who are then forced to join the buyers. The big pullbacks obviously represent exhaustion of buyers, probably including the shorts. Interestingly, the shorts win most of the time in this market, because gold is usually turned back at resistance. However, when the shorts lose, they really lose big.

How do we look this year from September 1, 2009 through today, October 9, 2009? Well, here we are so far….

I started this chart in July, just to make the graphics comparable (and more easily readable), but please start reading at September 1, 2009. So far, this year has been a bit more of a roller coaster ride.

To recap: 2007 saw a run-up of 30% from September 1 through the first week of November. 2005 achieved 20% by the second week of November (though bear in mind, this was a stronger run overall, as if 2007 had burned itself up a bit by rising more quickly).

Where are we now? So far we've seen 10-11% gains in the price of gold from the beginning of September through early October 2009.

My simple-minded conclusions are thus as follows:

1. The present breakout can run a long time, but won't go straight up.

2. The 10-11% gain in the gold price we have seen so far is only a start.

3. Pullbacks are inevitable, but the major pullbacks follow fairly lengthy and comparably stronger upward runs.

2007 had achieved 10% in 2 weeks, by mid-September. The 10% level was never violated, and acted as a base for further gains.

2005, which saw the stronger rally, achieved 10% in 2-3 weeks, but couldn't get past it until about the 3rd week of November (long wait). By November 7, it was almost back where it began on September 1. But then what? It took off through December 12, pulled back hard, then continued into that excellent 2006 spring rally through May 2006 (the best rally of the present 8-year bull market to date).

In neither case were the lows of September 1 revisited. In both cases, there were weeks of exhilaration and weeks of obvious frustration, not to mention several incidents of seemingly pointless retrenchment (these setbacks actually rebalance sentiment, a process which makes longer and stronger upward price moves possible). Despite recurring pullbacks, the dominant uptrend asserted itself powerfully for 7 months at a time.

After examining these more recent rallies, I developed the curiosity to look further back into the history of our current 8-year gold bull market. Here is 2003-04. In this rally, the run started in mid-July and continued through January 04. The same dynamics were at play, but with different seasonal timing. Long strong runs were followed by hard pullbacks. Note again that the run could trend steadily upwards for weeks - even for as long as 3 months!

What are the morals of this story?

Be willing to hang on. Accept that the patterns are hard to discern. Give it time - 7 months has proven itself to work well as a holding period 3 times in all 3 of the most recent major rallies.

The (primary) trend thus remains our friend, no matter how volatile the journey.

Don't forget that the best runs tend to follow the deepest retrenchments (the weak hands get really exhausted by massive blow-outs, so the uncommitted sell during these periods, strengthening the market and enabling further upside by favouring those more willing to hold through periods of volatility).

As we have noted, the 2003 rally was 7 months in duration. 2005 and 2007 were also 7-month runs.

So is strength in gold always a 7-month affair? Well, as we keep searching further back in time, it turns out that the answer is, “not necessarily.”

Consider April 2001 through February 2003. This is the rally that started the present bull market, reversing a 21-year downtrend In the price of gold. You’ve got it, this was a 21-month bull run, gaining again (though much more gradually) 50%.

Now here's another interesting pattern. The gold market has shown major retrenchment every 8 years going back to the 70s. This pattern certainly looks cyclical.

As it happens, we’re just coming out of one of those 8-year retrenchments. Is it just possible that we’re in for something more than a 7-month run this time? Maybe up to 3 times that long???

Of course a 50% gain from the breakout point would take us up to a $1500 gold price level, certainly an imaginable target if we’re thinking 21 months down the road (I have trouble visualizing this target by next spring, however).

A 65% run would of course take us more or less to the $1650 level, also imaginable in 21 months.

Notice that there was only one hard pullback during this entire 2001-2003 run, from June-August 2002. It was of 3 months' duration (an interminable period of frustration when you're riding an intermediate uptrend!). You could have sold at $330 and waited 6 months to get back in, but holding wouldn't have hurt you either, if you were a moderately patient sort, as you would then have been fully in the market when it made its explosive blowout in December 2002. (If you had sat out longer, you would have missed the major advance of the rally.)

Hmmm….

So, I wonder what's in store for September 2009 - ???

After conducting this analysis, I really don't know.

I do suspect that the current rally is going to be influenced by the 8-year trend as well as by the 2 year trend we've so far been pursuing on a de facto basis (that is, each major rally has started in an odd year so far – 2001, 03, 05, 07 and now, 09). Note also that September was a breakout month (or almost a breakout month) in 2001, 03, 05, 07 and 09. That is quite a pattern!

Now, what should we make of the 7-month pattern in the three most recent run-ups in the price of gold?

Based on the 2001 anomaly (21 vs 7 months of uptrending prices) and the previously mentioned 8-year cycle of recurring weakness (1976, 1984, 1992, 2000 and 2008), thinking in terms of 7-month rallies in the price of gold might just miss the boat this time around, as we are once again coming out of a once in 8 years episode of cyclical weakness (with the implication that the strongest rallies occur following these periods of "washing out weak hands").

While thinking of September breakouts every odd year happens to have worked 5 times out of 5 so far, it's not so easy to identify a clear causative factor for that pattern. My guess is that the easiest explanation is that seasonal strength in the fall has intersected upward trending long-term support lines every second year or so, but you'd really have to check the support line, rather than develop a numerological superstition about odd-numbered years, before acting on this pattern.

Now, imagine that you had sold 7 months out after the April 1, 2001 rally…. You'd have gained 15%, but missed the next 35%. As we are again coming out of one of these 8-year inflection points, we should think twice before expecting more recent patterns to dominate gold's present uptrending move.

Therefore, we might just want to be careful about selling too eagerly in 2010, based on the 14 to 21-month bull run that occurred at the last 8-year inflection point. However, perhaps 2001 to 2003 was just a long slow start after a 21-year bear market!?!

What we don't know is so much greater than what we do know, meaning that we have to watch for clues to inform our decision-making!

Let me make clear that the patterns I am discussing do not equip us with the power to predict. Rather, my intention is that we use the patterns to reinforce our innate ability to think in a flexible and multi-hypothetical manner.

Given the 8-year cycle, the widely discussed 17-year stock and commodity cycles (both now about half-way through), and the – shall we say – 70-year financial crisis cycle (I'm referring to the below-trend "crash" of October 2008 in the up-trending gold price, and the March 2009 recent bottom in down-trending stock prices), I have an eerie feeling that 2010 may not be a “typical” year. So if anything, there are some unusual factors at work… Thus, expect the unexpected.

Last year, I began writing that there is a “tsunami” coming in gold.

With the long anticipated breakout of gold above the $1000 level on October 5, 2009, I can now see the big wave out there on the horizon!

We are certainly in blue sky territory, as gold has never traded at this level before.

That is, there is no longer overhead resistance to the appreciation of the gold price. (I am ignoring monetary inflation, a factor I have discussed elsewhere, to make this point.)

In summary, I simply don't know exactly what is happening in the gold market right now, except one thing. The dilemmas of the past 8 years are now behind us, and a new phase is opening up ahead of us.

My sense is that something powerful, unanticipated, and at least partially unknowable appears to be at work. The gold market of the next 8 years will be more dramatic, more energetic, and more unpredictable than the one we have grown accustomed to over the past 8 years.

My advice?

I would make tsunami preparations… just in case. The gold bull is now more powerful than before, and none of us really knows what is going to happen next.

Comments are welcome…..

My gold tsunami posts are as follows:

There Is a Tsunami Coming in Gold

Gold Tsunami II: Anthropomorphizing Gold

Gold: Safe Haven in the Approaching Perfect Storm

Gold Tsunami III: James Kunstler's Use of the Analogy

Bond Prices: The Seismic Shift That Triggers the Gold Tsunami (IV)

Gold Tsunami V: The $23 Trillion Bailout... and Counting

Gold Tsunami VI: Looking for Patterns in Gold Price Advances

Gold Tsunami VII: This Is It

Gold Tsunami VIII: Gold Mining Stocks Now Participating
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