John Hathaway is Senior Managing Director of Tocqueville Asset Management family of six mutual funds formed in 1986. He has degrees from Harvard and the University of Virginia. Before becoming Manager of the Tocqueville Gold Fund, he founded Hudson Capital Advisors and worked Oak Hall Advisors as CIO. He has 43 years experience in the financial industry.
Recently Mr. Hathaway offered several gold charts that assist reasoned inference about the direction of the volatile and often irrational gold prices. YTD and especially in 2Q 2013 action in gold, a commodity in great demand among Asian Sovereigns and retail investors worldwide has been complicated by short selling and sharp price declines. Scroll down here to the fifth and last chart to follow the interesting pattern of advance and correction in the 12-year bull market in gold starting when gold was $280 in 1Q 2001.
There have been four major corrections during this run, each of them taking longer to surpass the previous high. The charts show that the decline that began 4Q 2011 still is within the parameters of the three previous corrections and the time sequences between the corrections.
The cyclical corrections within the secular bull occurred in 1Q 2003, 2-3Q 2006, most of 2008 and the present 23-month correction. The duration between the trough of each correction to the rise to a new high price increased from 29 to 68 to 75 and now 93 weeks and counting. There was a 132% increase in duration between the 2003 correction to new top and that which occurred in 2006. Compared to the 75-week 2008 decline, the current 93-week price sag is about 120%. If the pattern of trough-to-new-high duration in these cyclical corrections continues, we have another 6-7 weeks of volatility and general decline before a sustained rise toward new highs.
The enormous Sovereign and retail increase in gold buying by Central Banks and individual investors and the likely move to a world reserve system pegged to or including gold in my view precludes a bear market in the commodity. The entire PM (precious metals) sector to which it is pegged should recover when gold begins its next rise and demand short falls resulting from recent and ongoing cuts in capex and output hit markets.
The depth of the contractions during the 12-year bull also indicates that this fourth cyclical correction of gold will extend to maintain the trend and trajectory in the previous three sharp declines. In 2003 the drop of the gold price reached 16.2% before the rise toward a new high began. In 2006 with gold at about $780/oz the drop reached 22.6% before the rise to a new high began. In 2008 with gold at about $980 there was a correction of 29.5% before the bull resumed. The current 93-week fall off has been 35.7% and counting. Note that the correction increases in magnitude about 6.5% as the gold price rises following, until recently, enormous expansion in money supply.
Note too that the run-up to $1960/oz in September 2011 saw the largest rise, 91% of the three intra-high ascents. Based on the trend, there remains another .2-3% drop to equal the increase in corrections from 2003 to the one in 2006. With gold correcting from a higher high, one would expect the % decline from the peak to be greater and the duration longer before a sustained rise to a new high.
Conclusion: the twelve-year secular bull in gold is intact and its chart displays a notably consistent pattern of ascents to new highs and troughs that increase in depth. There is substantial symmetry between the first, 2003 decline and duration of rise to a subsequent high in 2006 and the current sell down.
What is new in the current correction in contrast to the previous one in 1Q-4Q 2008 is the creation of $7 trillion new national debt, the degree of currency devaluation, suppression of bond yields and inflation of asset values by fiscal policies not only in the US but all major economies. Also new is increasing Sovereign and retail buying of precious metals during the current 93-week decline and its crescendo in 2Q 2013, which saw the worst quarterly performance by gold since 1920. It was matched by massive buying. The last two weeks of June reportedly saw intake of more than 150 tons of gold/week through the Shanghai Gold Exchange.
Regarding the markets and signs of overbought and oversold conditions in various investment classes, note that since 1980 the DJIA has risen from 1000 to 15,000 while gold, including last quarter's trough hardly has doubled in price. Uncertainty and volatility have displaced clarity and consensus on Fed policy. Distortions in markets and currencies and organic weakness in all major economies precede "bouts of increased volatility and hyperinflation in 2014" in the view of economist John Williams. In addition to the factors noted in previous paragraphs, there are many reasons in historical trends, fiscal issues and supply-demand patterns suggesting a renewal of strength in gold and the PM sector.
The history of gold's bull run and its increasing fundamental strength, though obscured by an orgy of short selling, suggest that there will be increased volatility and fall in precious metal prices before the next leg of the ascent. The macro-situation argues that this run up will exceed, perhaps far exceed the 166% appreciation between the 4Q 2008 trough (gold at $780/oz) and the 3Q 2011 peak of about $1950/oz. Adjust your investment and allocation accordingly.
Physical-backed ETPs for gold include Sprott Physical (NYSEARCA:PHYS), Asian Gold Trust (NYSEARCA:AGOL), Swiss Gold Trust (NYSEARCA:SGOL) and Sprott Physical Silver (NYSEARCA:PSLV). There also is the Central Fund of Canada (NYSEMKT:CEF). Though Spider gold (NYSEARCA:GLD) and iShares Silver (NYSEARCA:SLV) are at enticing low prices, their susceptibility to manipulation on the options and futures markets and the extent of depletion (32.8% YTD) of their physical support makes them, in my view, less appealing for mid- and long-term investors.
Disclosure: I am long PSLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.