The Dow Report: A Cyclical Update on Gold
By Tim W Wood CPA, February 10, 2006
The technical picture for gold suggests that between now and early spring caution is advised, as more corrective action appears to be in the cards. It has been a while since I talked about gold, but I have been expecting this correction to begin, and given the current set up, it is now time to take another look at where we are and briefly at what should follow. In doing so, I want to review the last couple of comments I made here on gold so that you see where we are and just how we got here. As a result, you will also see why I have recently begun looking for this down turn.
In the June 10, 2005 Observation I explained that gold was "Poised to Rally" into at least an intermediate term advance. I said that this rally would be a "very, very important test for gold" and that the rally would tell us without a doubt if gold was still in a secular bull market or if it had turned the corner and now operated in a secular bear market. As this rally materialized, gold bettered the December 2004 high and in doing so, it set a new record for 9-year cycle advances. I'll get into this more below.
Again in the September 23, 2005 Observation I said,
"I believe there is a very good possibility that gold is now advancing upward in a new intermediate term cycle. If not, it’s close and that advance should begin after one more push down into that low. Either way, this will be the 6th such advance since the 2001 9-year cycle low. Could it be that 2005 will mark the first time to ever see 6 consecutively higher intermediate term advances? Or will 2005 serve to confirm that the 9-year cycle top has been made? I can’tstress enough how important the advance out of this intermediate term low is for the future of gold as it relates to the remainder of the current 9-year cycle. This advance is the first advance of this degree since the December 2004 top. Therefore, gold is about to be given a green light to move higher."
Both of these advances obviously occurred and yes, gold did better than the ever so important December 2004 highs in the process. In doing so gold moved further into uncharted waters, so to speak, because this latest intermediate term advance marked the 6th consecutive intermediate term advance within the larger 9-year cycle. Let me explain.
The most recent secular bull market for gold began in 2001 in conjunction with that 9-year cycle low. I call this cycle a 9-year cycle because there have historically always been 9 intermediate term cycles that average approximately one year in duration, nestled within this longer term 9-year cycle. This can be seen on the chart below.
Also notice that the 9-year cycle advance out of the 1976 low topped with the 4th consecutive intermediate term cycle. Each of these intermediate term cycles is marked with an "S." From the 1980 top there were then 5 of these intermediate term cycles down into the 1985 9-year cycle low, so there were a total of 9 annual cycles embedded within that larger 9-year cycle. From that low there were only 3 consecutively higher intermediate term cycle advances up into the 1987 9-year cycle top. Furthermore, there was then 6 intermediate term cycles to follow this top and gold again bottomed with the 9th cycle in early 1993. Notice again that there were 4 intermediate term cycle advances up into the 1996 top and 5 intermediate term cycles followed for a total of 9 cycles as the 2001 9-year cycle low bottomed.
As you can see on the chart above, gold is now in its unprecedented 6th consecutive intermediate term cycle advance up with the current 9-year cycle. Therefore, yes, this time has been very much different for gold. But nonetheless, corrections do occur as nothing moves in one direction.
Without getting too complex, the advances that I spoke of in the June 10, 2005 and September 23, 2005 Wrap Ups were even shorter-term sub-components of this unprecedented 6th intermediate term cycle. Furthermore, these advances now appear to be over, or at the very least, very near being over. This weakness comes as no surprise as I have been telling my subscribers all month that this correction was due to begin. We have known that the cyclical phasing was calling for this weakness to begin and that intermediate term lows were due in early spring. As a result of the cyclical phasing now being accompanied by this expected weakness, it is telling us that this 6th consecutive intermediate term cycle advance should now be complete. This weakness should now mark the beginning of the decline into the coming cycle lows, which are ideally due in early spring.
The good news is that once those lows are made, gold will be positioned to begin the 7th intermediate term cycle within the current 9-year cycle. At that time, I will begin monitoring the performance and measuring the statistical expectations of the next intermediate term cycle advance. In any event, the current issue at hand is that gold is now at risk for further weakness as the decline out of this intermediate term cycle top appears to have begun. This decline will serve to correct the $150 move that has occurred since my June 10th "Poised to Rally" Observation. This decline will correct the entire annual cycle advance, which last bottomed in February 2005 low. Another way of stating this is that this will be the first annual cycle decline since the December 2004 highs. Therefore, cyclically, this decline will be of the same degree as the decline out of the December 2004 high.
Understand that at present we do not have any confirmation that the current 9-year cycle has topped. This is another entirely separate issue that I am constantly monitoring. We are also closely monitoring the cyclical developments in the dollar as well. The dominant long-term cycle in the dollar is a 4-year cycle. This cycle last bottomed in December 2004 and there are some important developments now in the making within the dollar as well.
Should you be interested in the cyclical and statistical quantifications for gold, the dollar, bonds or the stock market, then visit www.cyclesman.com for information on the Cycles News & Views newsletter. In the February issue of Cycles News & Views I specifically cover the 2006 expectations for the stock market.
Tim W. Wood
© 2006 Tim Wood