A Brief Cyclical Review of Gold
On November 5, 2004 gold entered uncharted waters by performing a cyclical act that has NEVER occurred before. Yet, few are even aware of this first time occurrence. In this article I will explain this cyclical phenomenon and we will examine current conditions from both a bullish and a bearish perspective.
There is a long-term cycle in Gold known as the 9-year cycle. This cyclical rhythm can be seen in the monthly gold chart below. I want to begin with a look at this cycle and its interrelationship with other long-term cycles. The first 9-year cycle low shown below occurred in August 1976. From that low gold advanced 760% over the next 41 months. The 9-year cycle topped out in January 1980. From this high point gold drifted lower into the next 9-year cycle low, which occurred in February 1985. From this low gold advanced 80% as it moved into the next 9-year cycle top some 34 months later, in December 1987. The third 9-year cycle low began in March 1993. This lead to a 29% advance over the next 37 months as this 9-year cycle topped in February 1996. From the 1996 9-year cycle top gold, of course, declines into the most recent 9- year cycle low, which occurred in April 2001. Thus far, this advance has taken gold up for 43 months with a total advance of some 76%. If we factor out the extreme advance, which topped in 1980, we could argue that this advance has been somewhat average. So, let's give it a C+.
When we look at the monthly counts from the 9- year cycle lows to the previous 9-year cycle tops you will find that the longest count was 41 months and this occurred in the cycle that topped out in 1980. At 43 months the current 9-year cycle has now run longer than any other 9-year cycle advance. So, this is a first for any 9-year cycle advance and certainly could be considered bullish. I have to give this an A+.
Let's now break down our look at the 9-year cycle to the next degree. Nestled within the 9- year cycle is an annual cycle that averages some 11.45 months. Each of the previous 9-year cycles mentioned above has consisted of 9 of these smaller annual cycles.
There is also another first for gold from a cyclical perspective and it has to do with this annual cycle. Historically, the 9-year cycle has ALWAYS topped with either the 3rd or 4th annual cycle advance within the 9-year cycle. The 4th annual cycle of the current 9-year cycle topped in April 2004 at 433. From that high gold moved down into the May annual cycle low. This began a new annual cycle. This new cycle moved above the April high on November 5, 2004. This means that we have just seen the 5th consecutive higher annual cycle advance within the larger 9- year cycle. I have to give this performance an A+. It is for this reason that I say gold is now in somewhat uncharted waters.
In my analysis of this annual cycle I further divide this cycle into two categories. That being, bullish annual cycles and bearish annual cycles. I found that if the annual cycle advances for 6 months or more it tends to have bullish implications and if the advance fails in 5 months or less the prognosis for the cycle is bearish.
Specifically, the average advance for annual cycles that only advance 5 months or less is 12.42%. History also shows that 76% of the cycles that advance 5 months or less violate the previous annual cycle low once the move into the next annual cycle begins.
On the bullish side of the equation, the average advance for ALL annual cycles that advance 6 months or more is 50.97%. But, this number is somewhat skewed by two annual cycles. One was the annual cycle advance into the 1980 top. This advance was 279.57%. The second skewed annual cycle was the advance into 1996. This advance was a mere 12.47%. If we toss out both of these extreme readings the average annual cycle advance for bullish cycles with advances of 6 months or more is 38.13%. Let's see how close this average has held in relation to a couple of recent annual cycle advances. From the December 2001 annual cycle low to the June 2002 top, gold advanced 22%. From the August 2002 annual cycle low to the February 2003 top, gold advanced 31%. In the most recent complete annual cycle that began in April 2003 and topped in April 2004 gold advanced 35.4%. Understand that these are averages and these averages are purely meant to be a guide or a way to measure or develop some general expectations for the cyclical advance. We'll get to the current annual cycle in a moment, but first I want to share another statistic on the annual cycle.
My analysis of the annual cycle also shows that 89.5% of the annual cycles that advance 6 months or more hold above the previous seasonal cycle low once they roll over into the next annual cycle low. Furthermore, this analysis shows that the average decline of all annual cycles that top out in 6 months or more is 17.94%.
Let's now look at the current annual cycle, which began with the May 2004 low at 371.30 and has thus far run into the November 19, 2004 high at 448. First of all, this advance has now made it into the 6th month. So, if we look at the odds surrounding the annual cycle as a whole we can argue that gold now has an 89.5% probability of holding above the previous annual cycle low at 371.30, once this cycle turns down. On the surface this looks good and I would give it an A-.
But, what about the magnitude of the annual cycle advances seen by the current 9-year cycle? It is interesting to note that none of the annual advances seen in the current 9-year cycle have measured up to the historical average of 38%. So, when I look at all of the annual cycles that make up the current 9-year cycle I have to give them an overall grade of C-.
When I look at the magnitude of the current annual cycle by itself, it gets worse. Thus far, from the May low at 371.30 gold has advanced only 20.79% into the recent high at 448. If gold was to advance 35% as the previous annual cycle did it would take gold to just over $500. As you can see this advance has thus far been the weakest of the last 4 annual cycles. Furthermore, the current advance only measures up to just over half of the historical norm of 38.13% for this set of bullish cycles. This advance has only marginally beaten out the bearish annual cycles, which average 12.42%. In all honesty, the performance of this cycle has been poor. I'll let you grade this one. But, I have to ask, could the loss in momentum be a sign that the current 9-year cycle advance is weakening?
I now want to dig a little deeper into the statistic showing that 89.5% of the annual cycles that advance 6 months or more hold above the previous seasonal cycle low once they roll over into the next annual cycle low. In doing so I want to look at the exceptions that make up the other side of this equation. In doing so I find that there have been only 2 annual cycles that have topped in 6 months or more AND have moved below the previous annual cycle low. Each of these exceptions occurred at 9-year cycle tops.
Given this fact, I want to revisit the 9-year cycle and in doing so I want to show you something of interest. At the top of page 4 is a chart of gold and the CRB index. There is a 3-year long-term cycle in the CRB that is of extreme importance in relation to gold. I have found that once gold makes a 9-year cycle low it has ALWAYS topped with the first full 3-year cycle top in the underlying CRB. For example, I have marked the 1976 9-year cycle low in gold with a "9." If we go to the corresponding 3-year cycle low in the CRB, which occurred in 1977, we find that both gold and the CRB topped with this first 3- year cycle advance of the CRB. Gold topped in January of 1980 and the underlying 3-year cycle in the CRB topped in February 1980. The point being, that both topped with the first 3-year cycle advance of the CRB within the 9-year gold cycle.
The next 9-year cycle low in gold occurred in 1985. The corresponding 3-year cycle low in the CRB came in 1986. Gold topped in December 1987 and the CRB topped in June 1988. Again, the point being that gold topped with the first underlying 3-year cycle advance in the CRB.
As another example we have the 1993 9-year cycle in gold and the corresponding 3-year cycle in the CRB. This time, gold topped in February 1996 and the CRB topped 2 months later in April.
If we now move to the current scenario, we find that the last 3-year cycle in the CRB occurred in November 2001 and that the corresponding 9- year cycle low in gold occurred in April 2001. The "3-year" cycle in the CRB, like any other cycle, can contract or expand, but it has historically averaged 38.4 months in duration from low to low.
We are now in the 36th month of the current 3- year cycle in the CRB. As of today, I have no evidence that the current 3-year cycle in the CRB has topped. But, it is now in the neighborhood of where we should begin watching for such clues. Based on this historical pattern and the weak performance of gold, we can expect to see the 9-year cycle in gold top with the coming 3- year cycle top in the CRB. That is if this pattern holds. Maybe it will and maybe it won't. I'm not here to argue the point. The data speaks for itself and either we follow this historical pattern or we don't. But, this data currently is suggesting that the golden bull has about run its course.
Yes, gold has entered uncharted waters in terms of both the number of months that this 9-year cycle has advanced as well as the number of annual cycle advances. This is obviously good. But, it is the fact that the interrelationship between the 3-year cycle in the CRB and the 9- year cycle in gold has historically held consistent at tops, which warrants keeping a close eye on this development. We also want to continue monitoring the current annual cycle's advance. Thus far, this cycle's advance has been less than desirable and this could be a sign of trouble. Yet, the current annual cycle has advanced into the 6th month and this is typically very positive. But, we do know that two of the previous 9-year cycles have topped with annual cycles that have advanced beyond the 5th month.
Will the fact that gold has broken the historical count in terms of months and annual cycles override the poor performance of the current annual cycle? Could the violation of these historical norms overpower the historical relationship between the CRB and gold? In order to determine these answers we have to dig into the shorter term cycles work on gold and monitor it closely as it all unfolds. I will be releasing the December issue of Cycles News & Views this weekend. In this issue I will be giving a much more detailed analysis on this development. If you have a further interest in this type of analysis you can keep abreast of this development through Cycle News & Views. For more information please visit www.cyclesman.com.