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The chart above aligns the 1985 bottom in gold with the 2001 bottom. The price scale applies to both lines. The upper, gray time scale applies to the upper, gray line — the 1985-7 gold price. The lower, black time scale applies to the lower, black line — the 2001-4 gold price.
The gray line in the chart above is the gold price during the 1985-1987 advance. It was a significant rally in the bear market in gold that started at the 1980 top (click for chart). In fact, it was the largest rally (to date) in that bear market. Gold advanced over 75% from $284.25 on February 25, 1985 to $499.75 on December 14, 1987 (1,022 calendar days).
The thinner, black line on the chart is the most recent rally in the gold market. Gold advanced over 66% from $255.95 on April 2, 2001 to $425.50 on January 13, 2004 (1,016 calendar days).
The similarities in the comparison above are striking. Besides the fact that the durations were almost identical and that the percentage appreciations were very similar, the shapes are surprisingly similar.
Both rallies started slowly.
Both rallies had three, brief, near-vertical advances in their first year.
The second of those advances was followed by a month or two of sideways price action, and then a near-vertical decline that erased almost all of that second, near-vertical advance.
Almost two years into both rallies, they both accelerated up above their underlying trend, only to fall back towards the underlying uptrend within about six months.
The final peak in both rallies (assuming we've seen the final peak in the current rally), echoed that acceleration peak, but neither final rally could achieve the upper channel line (parallel to the underlying uptrend, see two charts immediately below).
The Gold BUGS index (Basket of Unhedged Gold Stocks, ticker HUI) peaked on December 2, 2003. The HUI is more volatile than the XAU, since the companies don't make significant hedges against declines in the gold price. The XAU Index (dominated by NEM & ABX) lagged the Gold BUGS index all through the rally. It peaked on January 6, 2004, when the timid finally got enough confidence to buy the big boys. Neither index could confirm the new highs that gold achieved on January 13, 2004.
While it is tempting to simply declare the advance that began in 2001 to be over, I am not going to do that. Over the years, I have learned that the market does whatever it wants to do, no matter how clever or compelling the analysis applied to it. Or, as my mother likes to say, I've paid my "fool's tax" already.
The January 13, 2004 peak at US$425.50 in the gold price becomes the critical point in this analysis. The longer that gold remains below that level, the more likely it becomes that the entire advance from the lows in 2001 was a bear market rally in the bear market that began in 1980. It was not the strongest, or even the second strongest (1982-3 was up almost 72% in only 239 days). It was not the longest, or even the second longest (1993-6 lasted 1,059 days, which seems to be about how long gold bear market rallies have lasted since 1985). In other words, not exceeding the the January 13, 2004 peak at US$425.50 would mean that the bear market has not ended, and new lows (below $252.80) are to be expected.
If the gold price should exceed that high, the rally will have lasted longer than the 1985-7 rally, and consequently, longer than any rally in the bear market that began in 1980. I believe that exceeding the $425.50 level would catapult the gold market through the $450 level (applying the same percentage advance that occurred in 1985-7 to the 2001 lows yields a target of $449.99). A London PM Fix of US$450 or more would make this the largest percentage gain of any rally since the bear market began. That would make it highly unlikely that we're witnessing a bear market rally, and that it is in fact the beginning of a new bull market.
It is my opinion (guess?) that the advance from the 2001 lows was a bear market rally that has ended. If I was a betting man (I'm not), I would say that it's probably 3:1 that the bear market has resumed. Because I don't know the future, I leave open the option that there's a 25% chance that this rally isn't over, and is, in fact, the birth of a new bull market in gold. A $30 advance isn't much, but I'm saying that I think it's only 25% likely that we'll see that advance (above $425.50). Every day that passes without the gold market exceeding $425.50 makes me more confident in my assessment of the situation. Breaking below the channel in the last chart would be a very strong indication that the recent party in gold ended on January 13th.
John Carder, CMT
March 1, 2004
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