Gold and the 9-year Cycle
It seems that the recent weakness took many of precious metals investors by surprise and many are obviously wondering what's causing the weakness. I'm sure that there is some fundamental "reason" for this weakness. But, I rely on technical analysis, cyclical and trend quantification and I can show you why the recent weakness in gold developed and that it was expected.
Before moving on here I want to explain that cycles in the market is really nothing more than a method of looking at the various trends of various degrees within a given market. We have long, intermediate and short-term cycles that are used to quantify the price movements of each of these corresponding trends. All three of these price trends are constantly at play as they ebb and flow with and sometimes against one another. For example, the longer term trend may be trending hard in a given direction, but then when the intermediate term cycle turns, it will create a secondary price movement that is counter to the primary trend as defined by the longer term cycle. It is through cycle analysis that we are able to separate these different time horizons so that we can analyze the interrelationship of the different trends.
First, some background and cyclical history is necessary. As everyone knows, gold made a major bottom in 2001. This is where the most recent secular bull gold market was obviously born. From a cyclical perspective, this was a 9-year cycle low. I call it a 9-year cycle because nestled within this longer-term cycle are 9 intermediate term cycles that average just under one year in duration. These intermediate term cycles ebb and flow within the longer-term 9-year cycle. When this intermediate term cycle is moving up in conjunction with the advancing 9-year cycle it produces very powerful rallies. Then when this intermediate term cycle turns down against the 9-year cycle it create a counter trend downward or corrective move. This downside movement serves to correct the previous advance and then the market moves on. Of course, the opposite is true when the 9-year cycle is moving down. I have marked the 9-year and intermediate term cycle lows on the monthly gold chart below. These intermediate term lows are marked with an "S" and the 9-year lows are marked with a "9."
Up until 2004 the 9-year cycle advance had never had more than 4 intermediate term cycle advances into the longer-term 9-year cycle top. Note that even the advance into the 1980 top occurred with only 4 of these intermediate term cycle advances. The advance out of the April 2003 low was the 4th intermediate term cycle advance within the current 9-year cycle. Therefore, gold was expected to top with that intermediate term advance in late 2003 or early 2004. Yes, as a result of that fact I indeed became very gun shy about gold. But, once the 4th intermediate term cycle low was made in May 2004, the 5th intermediate term advance within this 9-year cycle began. It was that advance that made "this time different" for gold as this advance carried gold up into an unprecedented 5th consecutive intermediate term advance and pushed gold into uncharted waters from a cyclical perspective. This 5th cycle up topped in December 2004. From that high, gold rolled over again into the intermediate term cycle lows in February 2005 as the previous advance was being corrected. From those lows the 6th intermediate term cycle advance within this 9-year cycle began. This cycle got off to a very slow start and looked as if it was going to be a failure. But, by June of 2005, things began to change as the new intermediate term advance began getting into gear. Then, in September gold bettered the previous intermediate term top turning the statistics for this cycle positive as well as marking a now unprecedented 6th consecutive intermediate term cycle advance. Yes, this time has truly been different for gold and as a result gold definitely remains in uncharted waters.
Now this brings us up to the present. I told my subscribers in the February newsletter that there was a clustering of cycles that were ripe to peak and what to look for to signal their peaks. This has now all come to pass and what is occurring is the decline into the 6th intermediate term cycle low, within the current 9-year cycle. This decline serves to correct the upside piece of the 6th intermediate term cycle. The way things are currently setting up, this cycle is ideally due to bottom in March or perhaps April. We are watching this decline closely for further developments and/or changes and of course for signs of the bottom. Once confirmed, gold will begin its 7th intermediate term advance and the good news is that that will be the next buying opportunity. The question then however, will become, Can gold move up into an unprecedented 7th consecutively higher intermediate term cycle peak? Given that gold is in these uncharted waters, anything is obviously possible. Our job is simply to monitor these intermediate term cycles for signs of tops and bottoms. Yes, at some point this entire 9-year cycle advance will be corrected and it will ultimately begin with one of the intermediate term cycles. Therefore, monitoring this as well as future intermediate term cycle advances and declines is key.
Presently, my focus is to monitor this decline as it progresses into the next month or so. Also, nestled within the intermediate term cycle are a couple of even shorter-term cycles of importance that are ebbing and flowing as explained above. Just as with the recent top, it is the interaction of all the cycles that provide the overall picture and that will cue us at the next bottom. If you would like more detailed and up-to-date information on these developments as they unfold, then Cycles News & Views is your source. I report on gold in the monthly newsletter as well as on my web-based comments during the week.