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The Long Heralded Gold Correction Arrives

The following was excerpted from the June 2006 issue of Financial Insights.

May 29, 2006 - Shortly after gold resolutely surged through $500 with nary a backward glance, noted expert after pundit began to board the gold correction bandwagon. At first there were a few. But one by one, as gold drove unimpeded higher, their number swelled. Finally, during what many of their league pronounced a parabolic rise that was destined to terminate gold's Bull Market, the members of the financial media turned their focus towards constant discussions of the end-game of gold's Bull Market.

In January, 2006, the yellow metal surpassed $550. It traded sideways for the next two months. Then, at the end of March, its character transformed. No longer were its daily upward surges limited to the $6 or so that characterized all but the past few months of its six year bull run. Now, price rises of as much as $12 to $20 dollars a day combined, and formed the resultant 180 odd dollar magnificent advance that quickly took it to $730 an ounce.

This was indeed both an exciting and substantial price rise. But to put gold's recent ascent into perspective, I would like to note a few somewhat similar episodes since its Bull Market's inception. Their percentage advances were not as great as the recent one, but they too qualified in magnitude, time, and form as being considered parabolic. However, during these earlier cases, the term was never mentioned.

The first was gold's climb that began shortly after it's Bull Market emerged in August, 1999. In mid-September of that year it staged a breath-taking +25% advance that took it from its then $255-$260 price to $327. This occurred in less than one month. Later, in early December, 2002, the metal soared from $315 to $385 by February, 2003. In this brief two month instance it ascended 22%. While these were both of lesser magnitude than the present example, their slopes compared favorably with it in conforming to a parabola. Yet, no one labeled them "parabolic" because like the present case, they weren't.

For its historical precedence and to help the reader better understand the "parabolic" concept, I will review the gold rise from its August,1979 closing price, to its January,1980 top. Gold began this historic and unprecedented advance at $320. In the space of barely five months it peaked at $875. This nearly vertical 270% price explosion was then as now, viewed as a true parabolic rise. In fact, the last six weeks of its ascent saw it nearly double in price from $450 to $875.

As is typical with all near vertical price rises that are true blow-off events, it heralded the eternal metal's two decade Bear Market. This was not unusual because genuine parabolic rises are quite rare, and have marked the terminal phase of many a Bull Market, across numerous markets.

Great gold price spikes such as the one encountered in1979-1980 were unusual events, but punctuated mankind's existence. Throughout history, when a country debased it's money for an extended period, by issuing excessive monetary units or by "clipping their coins" to pay their bills, its citizens eventually recognized the reduction in purchasing power of their savings and wealth; their assets no longer could acquire the things that they once did. When this realization spread among their fellow countrymen, a panic for self-preservation erupted.

The result was typically a flight from their currency. This was witnessed by a rush to exchange the domestic money for tangible items. The primary one was gold.

From the beginning of civilization repeated similar conditions evolved in many different nations. This caused some obscure individual to coin the euphemism, "there's no fever like gold fever".

Parabolic rises occur after a Bull Market finally attracts widespread attention. Earlier, as the Bull Market gradually unfolds, numerous investors and speculators observe from the sidelines. During the bull's course prices continually plod higher. Then, after substantial profits accrue to the early investors, those who missed the move begin to panic. They berate themselves for not having the foresight or courage to buy the market, and plunge in headlong. This causes a price spike that attracts further attention and additional excited buying. Finally, the price rises nearly vertically as panic, fear, and greed simultaneously well up in the hearts of the market's players. This, as the idea of missing still greater imagined profits consumes much of their waking and nighttime thoughts and dreams.

To my mind, today's gold market casts a shadow unlike that which existed between late1979 and January, 1980. At that time hoards of speculators and investors from around the world threw caution to the wind and plunged into the gold market. That was when cabbies, barbers and waitresses were bragging of their gold profits to anyone who would listen.

That was so unlike today! How many people do you know that have even considered an investment in gold, let alone actually taken an important investment position in the golden metal? I know of literally none among my close relations. This is because unlike1979, the public does not yet recognize gold as something important and necessary to own. Tragically, these are the same people who continue to follow the misguided belief that common stocks are a form of savings!

John Q. Public has not even dipped his pinky toe into the yellow metal's market. This will change when one day, likely several years in the future, the public enters the gold market en masse. Only then may we again witness a parabolic rise in the eternal metal.

Those who label gold's recent merely explosive two month 35% advance parabolic, should review the1979-1980 era. Then they will truly grasp what a parabolic gold price rise looks like. And, only then can they imagine what it felt like for those who were aligned either with or against its tidal force.

NO MARKET RISES UNCORRECTED SKYWARD

Gold has completed a major upwave in what I am confident will prove to be its greatest modern Bull Market. If I am correct this will ultimately pale its1970's experience. However, this does not mean that its historic price rise will not be interrupted with repeated sharp, frightening reversals such as the one that we are now experiencing.

To refresh the memories of those who participated from its bull inception, and to bring newer investors up to speed, we have already been forced to endure a few other harrowing and confidence testing time-frames in gold's present Bull Market. Of importance, despite these trying and gut-wrenching down-drafts, none of these ended the golden bull's reign.

As I stated above, gold's Bull Market was conceived at its August, 1999, $252.50 Bear Market low. After its initial stunning advance to $327 in October, its price again withered until it formed a double bottom at $255. This occurred in January, 2001. From top to bottom it lost 22% before finding absolute support. Later, in January, 2003, gold rose and struck $384. However, within the space of two short months, the bears drove it $65 lower for a 17% loss. Also, in March, 2004, gold posted a new bull high at $432. Again the bears took control and, within one month in April, overwhelmed the bulls and hammered it $60 lower to $372. This represented a 14% loss.

Thus, the current decline from $730 to its recent $637 low should be viewed in context as being nothing more than just another healthy set-back. After all, this price reversal merely represents a 13% give-back to date.

For the neophyte and seasoned "gold bugs" alike, who do not yet understand that "all corrections whether primary, secondary or tertiary are ultimately corrected", do not wish for an early end to the current weakness in the eternal metal. Rather, embrace its decline.

I do not pretend to know where gold is going in the short term. Much damage has been temporarily done to its price structure due to the already nearly 100 point price reversal. It may appear surprising, but I would not be shocked if this correction tests gold's 200 day moving average. In my opinion this will not only be healthy, but will help extend the longevity of its Bull Market.

The 200 day average is currently at about $531. It is rising at about a one and a half point daily rate. It is true that it might not decline to this level. However, a move to the $550 zone, or even a brief piercing of this moving average, will allow the excessive excitement and overzealousness that has built up in its market to dissipate. Further, as difficult as it is now to accept or even contemplate, this will represent a normal correction in the context of a secular gold Bull Market! If this ensues it will not only act to wash out all of the late-comers, trend and momentum players, but it will set the stage for a renewed, substantial advance from an extremely strong base.

In fact, as odd as it may sound, we should "hope" that the present correction lasts a few months or longer! For if gold shortly renews its skyward assault, we will likely experience a price explosion that may yet indeed appear parabolic. In that event, gold could easily surpass $1000 in the relatively short term.

Yes, it will briefly give us all a great rush, a sense of euphoria, and temporarily reward us for our foresight and courage. Unfortunately, from a longer term perspective after the final buy order is filled, the eternal metal will likely experience a major correction from which we will all directly and unduly suffer.

Even if the latter scenario unfolds, gold will still not have ended its Bull Market. It will only herald in many months of gloom and sharply falling prices. This could have been avoided or at least postponed had the eternal metal been allowed to now rather than later, wring the excesses from its market.

Rest assured. If I am correct, and a drastically lower price occurs before gold strikes its low, the eternal metal will again resume its bull run and post new, stunning highs on the way to its final Bull Market peak. There truly is "no fever like gold fever". For good or for bad I believe that we will again witness such an experience. But, it will occur far later, in what I believe history will dub its greatest Bull Market.

I publish Financial Insights. It is a monthly newsletter in which I discuss gold, the financial markets, as well as various junior resource stocks that I believe offer great price appreciation potential.

Please visit my website www.financialinsights.org where you will be able to view previous issues of Financial Insights, as well as the companies that I am presently following. You will also be able to learn about me and about a special subscription offer.

 

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