Gold Market Long-term Correction Continues

| May 19, 2013

In September 2011, our cycle analysis predicted the formation of a long-term top in the gold market. Following the development of a consolidation formation from late 2011 until early 2013, prices moved below congestion support in the 1,550 area. As expected, the breakdown was followed by a severe decline of 12 percent during the last six weeks.

Our Gold Currency Index (GCI), which tracks the intrinsic value of gold as an international currency, has moved sharply lower in a similar manner, reconfirming the long-term correction that began in 2011.

With respect to cycle analysis, the sharp decline this week has reconfirmed the bearish translation that has persisted since late 2012. However, violent declines such as the move that began in April often result in cycle compression and it is likely that the next intermediate-term cycle low (ITCL) will form earlier than usual. The initial best estimate for the next ITCL window was from June 28 to July 26, but it is now likely that the forthcoming low will form sometime between May 31 and June 28.

The long-term correction from 2011 has retraced 29 percent of the secular bull market advance that began in 2001. This is typical behavior for a cyclical downtrend within a secular uptrend.

However, the Gold Miners Index has declined 58 percent from its comparable high in 2011, returning to levels that were first attained by the secular uptrend in late 2003.

From a big picture perspective, the obvious question is: has a new secular downtrend begun in the gold market? Given the historic expansion in the monetary base engineered by the Federal Reserve, along with the resulting structural imbalances, it is highly likely that the secular bull market remains in progress. The size of the monetary base has nearly quadrupled during the last five years and there is no known process through which this excess liquidity can be removed from the system without causing significant economic disruptions.

While contained at the moment, price inflation will almost certainly become a very big problem later this decade, probably beginning sometime during the next 2 years. Therefore, the fundamental foundation for the secular bull market in gold remains intact and we are likely several years away from the terminal phase of the rally. Cyclical corrections such as this one are healthy developments as they serve to purge speculative excesses from the market, thereby preparing it for the next phase of the advance. Additionally, they provide long-term investors with opportunities to add to their positions. As always, those accumulation opportunities are best identified through the use of optimal entry points as defined by the judicious application of chart analysis and we will report those opportunities as they develop.

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Category: Commentary, Market Update


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