If we had to pinpoint a time during the last 10 years when the gold price
broke out into a full on bull market, it was in 2005 when the $500 level was
clearly broken. That was a key level at the time and this break out coincided
with the launching of gold's ETF, GLD.
It was also clearly a break away from the dollar as gold began jumping up
in all currencies. This is when the bull market started heating up and gold
never looked back until it surpassed the 1980 record high in 2008.
The financial crisis pushed the gold price down in the sharpest correction
in the bull market, yet gold closed 2008 up on the year, which was only bettered
by bonds at the time. Most impressive, it didn't take gold but a few months
to reach a new high once again.
Most important and the reason why we are going over the bull market is because
the gold price has been on a tear with not even a 14% decline since the crisis
low in Nov 2008. Gold entered a stronger phase of the bull market along the
way in September 2009, and once again it never looked back.
Interestingly, the Nov 2008 crisis low was near the recurring 8 year lows
that gold has followed since the 1970s. That is, gold tends to reach a low
every 8 years (see Chart 1). If this pattern continues, this means that
gold has several more years ahead for an exciting bull rise to develop. In
many ways it feels like 1976 again... only this time around the world is more
complex and involved. The emerging world is carrying the load, while the developed
world strangles on debt.
Bull: Time for a rest
For now, however, gold is in a downward correction that began with the new
year and it's been moderate, only declining 7% so far. Is that all there is
or will gold decline further? That's the big question... Will it be a decline
similar to the one last February when gold fell 13.30%, or will it be milder,
like in the summer when gold lost about 8%? We'll soon find out, but a correction
at this point is not at all unusual. In fact, gold's strong rise was overdue
for a normal correction.
Gold Timing
The key now is to watch the guidelines to measure gold's weakness. Our best
guideline is shown on Chart 2. This indicator is our favorite in helping
to time intermediate moves in the gold price.
The best rise in gold's bull market is a rise we call "C". The latest one
had been in process since April 2009. This rise peaked on January 3rd. This
means gold rose almost 64% in this 21 month time period... a super rise indeed
and the strongest C rise of the last 10 years.
Our focus now is on the current decline, we call D and to measure its likely
depth. A 10% - 15% decline would be a healthy one and it would still show overall
bull market strength. This means a decline to the $1280-$1200 level would be
a normal decline within gold's strong bull market. This level also coincides
with the 65-week moving average, the major support level, now at $1230. D declines
tend to fall to this average, but the exception was the 2008 extreme during
the financial meltdown. Whether this decline ends up being mild or more severe,
it's providing a good buying opportunity. Use upcoming weakness to buy with
both hands.
