Friday, October 09, 2009

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.)


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


  1. Incredible post, congratulation on such amazing anaysis.

  2. Thanks very much. I have long viewed "hidden strength" as the greatest type of strength, and we have that in spades in the gold market!