Back to the 1970s
Gold's bull market is alive and well since reaching a 16 year high in early December at $456. And the decline we've seen since then is normal.
Gold's 16 year high last month reinforced that the current bull market has now clearly outperformed the bull markets in the 1980s and 1990s in both time and price gains. This confirms the current bull market has now been the strongest since the 1970s and it could be similar, eventually reaching $800 or more.
It's not really surprising when you see the similarities compared to the 1970s. The most obvious is the high oil price. It rose over 400% in 1971-1974, which is about the same as the 400% rise oil has had in the last six years.
The budget deficits and an extremely loose monetary policy are also similar, as are the costs to finance an expensive war.
Furthermore, just as the industrialized world now has stiff competition with China and India causing disruption in the manufacturing and service industries, the 1970s had a similar situation with Japan and Korea. In both cases, it hurt the West.
China and India are also keeping upward pressure on commodities due to their growing demand. In the end, it's very possible we'll see rising inflation and slower growth, which would be very good for gold.
GOLD TIMING: On track
Meanwhile, many of you know how well the 65-week moving average has worked in identifying the major gold price trend over the years (see Chart 1). Gold rose above this average in August, 2001, triggering a major buy signal, and it hasn't looked back. This moving average is currently at $408 and gold's major trend is up above that level.
Since August, 2001, the times gold declined to this average was during a D decline, which is precisely where gold is today, since what we call a D decline started last month.
Many times these intermediate moves will tell us if a major change is in the making and so far they're signaling the bull market is solid. The latest "test" was when gold hit a high last month. The previous C rise performed well taking gold to a new bull market high, which is normally the case during a C rise, and that was important for the strength of the major uptrend.
For now, a D decline is underway below $435 and we could see gold stay weak until the end of January to mid-February time period. This would be normal, but if it ends up lasting as long as the previous D decline did, we could see weakness until April. The end of this decline will be the next ideal time to buy new gold positions.
GOLD SHARES: Disappointing
Gold shares have been disappointing. It's been frustrating for investors to see gold shares end the year lower than where they started as they watched gold rise to 16 year highs.
We know that gold shares move with gold (see Charts 2A and B). The vertical lines show how gold shares rose during gold's previous C rises going back to 2001. But another pattern is developing too...
Of the five C rises gold's had since 2001, the 2nd and 3rd ones in the XAU gold share index were similar to the 4th and 5th ones. The best gold share moves took place during the 2nd and 4th C rises when gold shares shot up to new highs, strongly outperforming gold. In both cases, the following C rises (#3 and #5) were lackluster rises in gold shares, despite the strong gold price.
If this pattern continues, we could see the strongest gold share rise take place later this year with gold shares hitting new bull market highs.
The only thing that bothers us is the big picture on Chart 3. This shows the gold shares to gold ratio going back to 1969. You can see the rise since 2001 has so far been a rebound rise within a major downtrend that goes back to 1969. The peak in the ratio occurred a year ago at the major downtrend. And the lack of strength in gold shares last month was not a good sign because the ratio failed to break above the major downtrend.
The bottom line... gold shares are at a critical juncture compared to gold. If the alternating strong-weak C rises continue, then gold shares will be the better investment. But if gold shares fail to strongly outperform gold this year and the ratio falls below its 2004 low, the alternating trend since 2001 will change and gold will then clearly be the better investment compared to gold shares.
If gold outperforms gold shares this year, however, it won't affect the bull market. Note from 1973 to 1980, the ratio fell sharply as gold strongly outperformed gold shares. In other words, an investor would've wanted to be heavily invested in gold at that time.
Meanwhile, until the trend clarifies, it's best to keep half of your portfolio in metals and half in gold shares. Then as it becomes clearer, we'd adjust and go heavier into the strongest area. For now, keep your gold coins, gold contracts, gold mining shares and the new gold ETF, GLD.