Investing to Wealth

I don’t want to harp on gold too much but since we discussed the various gold sentiment measures recently and the Rydex traders rushing out at the shallow correction, I wanted to also provide a long term perspective.

Back when taxi drivers were becoming daytraders and when any public corporation could depend on a pop in their stock price just by adding “.com” to the end of their name, gold was being shunned by the general public. The double bottom which launched the secular bull market was formed when gold fell to a low of ~$250 in 1999 and again in 2001. In the ensuing decade it rose almost five fold:

The long term trend line (green) goes back to 2001 but it accelerated (the slope steepened) in 2005 (blue line). This also coincides with the start of the parabolic spikes in price of gold.

Most importantly, this long term chart puts into perspective how shallow the retracement has been so far this year. But nevertheless, it has caused the “dumb money” to flee for the hills. That is bullish in the short term. But if gold were to turn up here and just ramp higher we would be right back in a parabolic situation just like we’ve seen 3 times already.

A correction to $900 - crashing through the psychological $1000 level - would still allow gold to remain at the accelerated trend line from 2005. And a super-bearish decline all the way to $760 would only take us back to the very long term trend line which goes back to the beginning of this bull market.

Can you imagine how demoralized the “gold bugs” would be if gold does indeed fall 18-30% more from here? The last two times that gold went parabolic it was followed by a 20% correction (2006) and a 30% correction (2008). So a decline of that magnitude is neither uncharacteristic nor devastating.

In fact, a lasting trend needs to be moderate in tone. If gold corrects to the $1000 level and then bounces off it strongly as it did in 2008 off the $700 level, it will only set up a third accelerated trend line. While the bulls may cheer such a move, it will put the secular gold bull market in jeopardy. In such a scenario, the long term picture will itself become parabolic - rather than just containing small bouts of parabolic activity.

So to sum up, my crystal ball is telling me: short term gold is higher, medium term, lower. And long term, still a secular bull market. But then again, maybe I’m reading it wrong

For another perspective, check out this video by Adam Hewison: Is Gold Poised to Go Higher or Lower?