GOLD: PUTTING IT INTO PERSPECTIVE
by George Kleinman
Editor, Commodities Trends
November 13, 2006

Goldman Sachs tells us commodity funds have $100 billion to invest in the commodity markets during 2007. China has $1 trillion in cash reserves (mostly in US dollars) and has expressed an interest in diversifying its investment mix in 2007. Is it possible a portion of this cash hoard will end up in gold?

That�s a reasonable assumption.

I�d like for you to change your perspective today. Think longer term (not easy in the thick of the day-to-day investment battle) and consider looking at the future by benefiting from past markets. I�ll discuss the future shortly, but first I want to transport you back to the 1979-80 accelerated gold trend, the daddy of all gold bull moves. While 1979-80 was the most-exciting part of this move, the bottom actually was actually formed much earlier, during the summer of 1976.

Gold was trading for about $100 an ounce in August 1976. In January 1980, it peaked at $875--an 875 percent run in three and a half years, approximately 250 percent annually. And this is a raw number; if you were trading gold futures on 5 percent margin, the profit potential was outrageous. But the ride was neither easy nor expected.

When gold was �cheap,� nobody I know predicted a move of this magnitude ($300 was considered �quite high� when gold traded at $250). And at the $875 peak, predictions of $1,000, $2,000 and even $5,000 gold ran rampant. As it turned out, the January 1980 high remains the all-time high price, with or without 25 years of inflation.

Let�s assume you were riding the gold bull in 1979 and were astute enough to buy gold at $220 early in the year--at the time a record high. The move was fairly orderly until the spike to a new high of $441 in early October. Take a look at the following chart.

Weekly Gold October 1977�October 1979


Source: Commodity.com

Assume you�re on this move, whether through futures, gold stocks, gold options or some other gold-related investment. Now, be honest: What do you think you would have done when the market began to head south? Remember, you�ve doubled your money in physical gold in less than a year, a 100 percent move, and many times this gain in a leveraged investment. The market appears frenzied, like it often does at the top. It drops 5 percent, then 10 percent.

Would you have taken your profits?

How about when it dropped more than 10 percent? The market broke to $365 in early November, a 17 percent correction. It would have been very hard to have not cashed out during this time.

Let�s put this into perspective, because I�m going to fast-forward the above chart of weekly gold three months ahead:

Weekly Gold January 1978�January 1980

Source: Commodity.com

Putting it all into perspective, the massive 100 percent move appears tame compared to what was to come. Gold, which had doubled from $220 to $440 in only 10 months, doubled again in just another three months. The October-to-November 17 percent correction looks quite minor on the chart above and appears to be what�s called a flag formation. Once the flag was broken to the upside (in November), a monster move developed.

1979-80 was an exciting time for commodities and the most-exciting gold bull market of all time. Let�s now travel from the past to the present. The recent gold market is without question the second-most exciting, but is it possible the real monster move hasn�t even taken place yet? Is it possible the current gold bull has the potential to emulate and outdistance that of 1979-80?

Gold has had a decent run during the past few years: It just about doubled from the April 2004 bottom to the May 2006 peak. Take a look at the current weekly chart.

Weekly Gold October 2004�November 2006

Source: Commodity.com

The market peaked in May then embarked on a vicious 23 percent correction from the top. It appears to have formed a major top, and I know of nobody who calmly rode out this correction. But what if this is similar to the 1979-80 move? Is it possible this vicious correction will seem tame in the future?

The weekly chart appears to have formed a similar flag formation during the past four months--one that resulted in a breakout to the upside during the past few weeks. In 1979-80, the gold price doubled from $220 to $440 during the first major leg and then doubled again from $440 to $875 after the flag formation was completed. We already know the market doubled from about $365 to $728 in this go-round.

Let�s move from the present to the future. The future is of course unknown. But interpolating from the past, another double would put gold at $1,450.

© 2006 George Kleinman
Editorial Archive

KCI Communications, Inc.
1750 Old Meadow Road, Suite 301
McLean, VA 22101
703-394-4931 phone 703-905-8100 fax Email

Risk Disclaimer

Futures and futures options can entail a high degree of risk and are not appropriate for all investors. Commodities Trends is strictly the opinion of its writer. Use it as a valuable tool, not the "Holy Grail." Any actions taken by readers are for their own account and risk. Information is obtained from sources believed reliable, but is in no way guaranteed. The author may have positions in the markets mentioned including at times positions contrary to the advice quoted herein. Opinions, market data and recommendations are subject to change at any time. Past Results Are Not Necessarily Indicative of Future Results.

Hypothetical Performance

Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.