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In a nutshell, this week
we decided to provide you with the analysis of the previous bull market in
the precious metals. The goal is to see how the current bull market compares
with the previous one. After all, since history rhymes, looking at the
analogy should provide us with clues as to what can happen next. In
particular, we will be able to estimate if we’re currently on a verge
of the final parabolic upswing and if this bull market is likely to end soon.
The above chart presents the
DJIA:Gold ratio in two time spans: 1950-85 (red line) and 1999-2011 (golden
line). The 1999-2011 has been superimposed on the older data. The chart
points to the fact that in the period between 1965 and 1975 the ratio had
been falling roughly in the same way it did between 1999 and 2011. We live in
a globalized world, so looking at gold’s price relative to stocks might
be more appropriate for long-term tendencies than a look at the gold price
itself, simply because the major shift in investor’s sentiment happens
when investors prefer gold to the most popular investment class –
stocks.
The methodology here is, therefore,
to compare the decline in the DJIA:Gold ratio around the 70’s bull
market and compare it to the decline seen in the more recent years. Things to
look at include the size of the decline, the time it took before the decline
ended and the overall shape of the downswing.
As far as the size of the decline is
concerned – in both: time and range – the slide seems far from
being over – which means that the bull market in the precious metals is
likely to continue. The analysis of shape confirms that both bull markets are
indeed similar. However, the most interesting implication is based on the
late 1974 rally in the ratio.
As we see that 1974 and 1975 marked a
significant trend reversal, we might expect a similar move to happen in the
near future. This would imply a significant correction in the precious metals
sector and possible rallies in the general stock market before the precious
metals sector regains its strength and continues moving up.
Clearly, this is not the time to stop
paying attention to warning signs about a possible decline in the precious
metals. Let’s take a look at the gold chart.
In the chart above, you see the price
path of gold in the years 1999-2011 (golden line) superimposed over
gold’s price path between 1950 and 1985 (red line). The vertical axis
represents the older data while the values of the recent data have been
rescaled to properly reflect the corresponding price changes. After a short
comparison you might notice that today gold seems to be in a similar
situation to where it was in 1975. This would suggest that we are in for a
significant correction in the precious metals sector before the bull market
resumes. It would also imply that any correction seen in the following month
would not end the current bull.
The above chart is similar to the
previous one, except for the fact that it presents silver, not gold. Once
again, the current bull (green line) has been superimposed over the price
path between 1950 and 1985. Even though the price paths here are less similar
than in previous cases, they still point to the fact that the silver rally
might be followed by a substantial short-term correction or at least by a
sideway trend. Just as in the previous cases, this should not be perceived as
the end of the current bull.
Summing up, there will be a time gold and silver move straight up
without any corrections, but analysis of the previous bull market suggests
that this moment is still years from today. Moreover, this is not the time to
stop paying attention to signals indicating a significant correction around
the corner. Finally, this is not the time to stop trading the precious metals
market (in general).
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Thank you for reading. Have a great and profitable week!
Przemyslaw
Radomski
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