Why Gold Could Hit $1,300 This Year

Gold may be nearing its next major leg up.

No investment ever goes straight up or straight down. During the last bull market in gold, the precious metal rose 2,329% from a low of $35 in 1970 to a high of $850 in 1980. However, during that time, there was a period of 18 months in which gold fell nearly 50% (see the chart below).

As you can see, from mid-1971 to December 1974, gold rose 471%. It then fell 50%, from December ’74 to August ’76. After that, it began its next leg up, exploding 750% higher from August ’76 to January 1980.

Now, in its current bull market (2001 to March 2008), gold rose over 300% from $250 to a little over $1,000. And just like in the mid-70s, it began showing signs of weakness after its first big rally up to $1,014 in March ’08. At one point, it even fell to $700, a 30% retraction.

Granted, it wasn’t a full 50% retraction like the one that occurred from 1974-76. But we are experiencing a financial crisis. And gold is the most common catastrophe insurance.

If we were to go by the historic pattern of the gold market in the ‘70s, gold should experience upwards resistance for 19 months after its first peak today. Gold’s recent peak was $1,014 in March ’08 (roughly 17 months ago).

If this bull market parallels the last one, then gold should renew its upward momentum in a very serious way starting in October 2009. And this next leg up should be a major one (the biggest gains came during the second rally in gold’s bull market in the ‘70s).

The chart certainly forecasts a major move.

As you can see, gold has formed a long-term inverse head and shoulders formation (two smaller collapses book-ending a major collapse). Typically a head and shoulders predicts a massive collapse. However, when the head and shoulders is inverse, as is the case for gold today, this typically predicts a MAJOR leg up.

Indeed, any move above the “neckline” of 1,000 would forecast a MAJOR move up to $1,300 or so. Going by history, this is precisely the move we should expect: remember based on historical trends (the gold bull market of the ‘70s) gold should begin its second and largest leg up in September or October 2009.

Watch the gold chart closely over the next month or so. If gold makes a move above $980 perhaps add to your current positions. If it clears $1,000, hold on tight, because the next leg up in this secular bull market has begun.

Good Investing!

Comments

[whidbey:]

Thrilling, but a little frightening.

What will the gestapo at the Fed and Treasury do at 1000? Paul V once said the only thing he did wrong last mess was to not control gold prices. Does the old snake charmer have one last stunt to pull??

BO is said to dislike Paul because he is the exact archetype of the old white overlord, cigar and whip and all. I hope that is not racist.

Aug 04 04:47 PM

[Jake2:]

Problem with the second chart is that you have taken a small piece of a long term trend and used it to support your thesis. At best this could be called tendentious; at worst lying with figures (as opposed to lying with numbers). However, I respect your efforts and I am not accusing you of anything devious or dishonest. If nothing else your article is provocative and interesting.

Aug 04 06:05 PM

[Jake2:]

Widbey: " . . . the exact archetype of the old white overlord, cigar and whip and all. I hope that is not racist." See ,"Waiting for Godot." Ask Lucky. He'll tell you.

Aug 04 06:09 PM

[RiskReturnO...:]

Gold at $1300 would mean >4.0% yield on 10-year bond ... long TBT as there is less overhead resistance until $60 (roughly 20% upside).

Aug 04 06:59 PM

[Mono:]

last time USD index was at this level and USD/EUR was > 1.44 gold was 992. they are doing what they can to suppress...but the run to 1200-1300 will be fast and continuous

Aug 04 07:48 PM

[Mono:]

i used to look at the gold silver ratios. then i just became to worrisome of default on silver. know it sounds paranoid but would rather hold gold contracts over silver just in case. there are no major concentrations of silver on a comparison basis to gold. if the gov needs to go get something in a panic they will just hit up the major banks. a bit harder with silver as they would have to go the street and individuals.

not saying this will happen- but just in case the risk is heavier with silver.


On Aug 04 06:23 PM Freya wrote:

> I turned cautious at the end of June, when the right shoulder started
> extending. The Chart Is bullish, but the right shoulder has become
> worrisome.
>
> However, I do think the fall in the USD will help push it through
> $1,000. After that a measured move should take it to $1,300 eventually.
>
>
> The initial punch through may stall around $1,100 because of the
> way, I believe the right shoulder is structured.
>
> Anyway, thats the way I look at it.
>
> Please consider this too. A Gold/Silver Ratio of 50 would put Silver
> at $22. Considering where Silver is now, you will get more leverage
> from it.

Aug 04 07:50 PM

[Marc Courtenay:]

I agree about silver being the better investment from an upside potential standpoint


On Aug 04 06:23 PM Freya wrote:

> I turned cautious at the end of June, when the right shoulder started
> extending. The Chart Is bullish, but the right shoulder has become
> worrisome.
>
> However, I do think the fall in the USD will help push it through
> $1,000. After that a measured move should take it to $1,300 eventually.
>
>
> The initial punch through may stall around $1,100 because of the
> way, I believe the right shoulder is structured.
>
> Anyway, thats the way I look at it.
>
> Please consider this too. A Gold/Silver Ratio of 50 would put Silver
> at $22. Considering where Silver is now, you will get more leverage
> from it.

Aug 04 09:54 PM

[Peter Cooper:]

The Cons: the leverage also works in reverse, and if stocks take a tumble so will gold and silver will outperform gold to the downside.

That said for the next 18 months silver looks the best investment of all!

Aug 05 12:35 AM

[Mono:]

agree on some level. if it was about industrial production and not monetary policy i would use one of your pros. again- what if the exchange defaults and the administration needs to get physical...where will they get it. double edge sword having government stockpiles


On Aug 04 11:28 PM Freya wrote:

> The Pros: Silver has the added perception of Industrial demand. There
> are no Silver stockpiles in Government hands. Its production was
> severely hampered because they were a byproduct of many other basic
> metal mines shutdowns/slowdowns. Its uses have expanded. You have
> another ETF storing physical Silver. It plays a role as an Inflationary
> hedge.
>
> The Cons:
>
> I rest my case.

Aug 05 08:00 AM

[swaps:]

You've scared me into adding to my NGD holding today.
And I won't cash in half my GG or KGC shares to lock in nice profits. Especially since GG has a new silver mine just coming into production. I appreciate the comments noting how silver will have more leverage if gold hikes to $1,300.
Your intellect is golden and glitters in this hazy economic landscape.

Aug 05 11:22 AM

[Vox Rationalis:]

Anybody looking to the 1970s, during which the CPI doubled and gold moved from a failed fixed-price model to a market pricing model, for guidance today is on a fool's errand.

Aug 05 12:20 PM

[odin:]

Always consider the possibility (however remote you think it might be) that your thesis is incorrect. The proportion held by long-term holders: central banks (save for China/Russia), jewelry buyers, industrial users is steadily going down. The proportion held by "hot-money" investors -- ETFs, hedge funds -- has skyrocketed. Draw your own conclusions at what will happen IF that hyper-inflation/crisis deflation thesis is wrong.

Having said that, gold has a valid place in a well-diversified portfolio.

Aug 05 12:39 PM

[Relative Le...:]

Nice analysis, but I think your upside estimate of $1300 is too conservative for gold. I think if we break through the $1050-$1100 level...gold could easily see $2000. It may not be for a few years, but I think the fundamentals and technicals are both pointing in that direction...

If you haven't read Professor Rozeff's piece discussing his top 10 reasons why you should make gold a core holding, I suggest you check it out (see link below).

consequencesunintended...

Aug 05 12:48 PM

[Zachary Sch...:]

I think gold could certainly have a strong run, but actually have more confidence in Silver. The dual purpose metal (both an industrial metal as well as a precious metal) is facing production shortages at a time when inflation could add sharply to demand. On top of that, the industrial uses for Silver could compete with inflation hedges to push Silver past $20 fairly quickly (that's 36% from here and it actually could go much higher).

zachstocks.com

Aug 05 01:06 PM

[lefty2guns:]

I think using historical data is always a great way to learn as to what the future may hold for us. However, I think that the big issue is no two time periods are identical. Debt levels for the U.S. as well as the consumer are far different today than back then to name few. I believe long term trends and fundamentals is what will make precious metals attractive. Usually in any long term asset rally, the last upward trend will be when the general public gets involved which is starting to happen. In the case of precious metals, supply is limited which will drive up price even more.

The analysis is informative, but I would be wary to make decisions strictly based off historical trends.

Aug 05 02:23 PM

[IT'$ OVER!:]

The economies compared between the 70's and now are completely different. In the 70's, the uptrend in Gold had everything to due with the US abandoning the gold standard and investors subsequent unease with that decision. Then later in 1980, we had historically high interest rates chasing inflation just as high. So direct comparisons at this point are a little premature.

However, I do believe that after the government is through printing money to buy bailouts, and issuing record high treasury bonds. We will see higher inflation. The FED will enact similar interest rate policies to the 80's to deflate the real value of their debt, gladly producing nominal returns in stocks, but subsequently unhinge debt holders whose current holdings will devalue.

Those debt holders will then cash in their dollars for hard assets, flooding the market even further. Fueling a run on those hard assets (commodities, land, equipment) and also making the USD more dilluted, compounging the already existing inflationary pressure.

I don't know about ya'lls, but I see this simple progression as inevitable and doesn't even factor in unemployment, rising government expenses, social security, health care, or the end of cheap credit fueled US consumer consumption (comprising 2/3 US GDP).

So comparing now to the 70's is pointless, cause this time I don't see where our current trend meets its 1980 comparison. Basically, I don't think there will be an end to Gold's climb compared to the USD, I think that Gold will take off, break USD's gravity and leave orbit.

On Aug 05 12:20 PM Vox Rationalis wrote:

> Anybody looking to the 1970s, during which the CPI doubled and gold
> moved from a failed fixed-price model to a market pricing model,
> for guidance today is on a fool's errand.

Aug 05 05:09 PM

[Peter Cooper:]

Beware an imminent stock market correction that will impact gold and gold equities - remember last summer? That would also rally the dollar but this is also why the author is most likely right in picking October for the next leg up in gold. It could retest $850 before then in a big dollar rally as shares are sold down and converted into dollars and bonds. Incidentally this should also mark the top of the bond market, and that must be the next bubble to burst. As it does the biggest financial market in the world will inject its capital into one of the smallest (i.e. gold and silver is one hundredth the size of gold)....

Aug 06 04:08 AM

[ron_paulite:]

In another article you wrote two days ago, you said "I am officially going on record now and stating that IF the S&P 500 hits 1,000, we will see a full-blown Crash like last year."

So now S&P 500 has hit 1,000... and we will see a full-blown crash like last year?

And now you are saying gold will go up to $1,300 this year? If S&P 500 crashes like last year, gold can still go up to $1,300??

Don't get me wrong. I'm a fan of gold, and hold physical gold. But if S&P 500 crashes like last year, it is unlikely that gold will hit $1,300. Last year when S&P crashed, gold dropped to $700.

Aug 06 04:20 AM

[Vox Rationalis:]

On Aug 05 05:09 PM IT'$ OVER! wrote:

> In the 70's, the uptrend in Gold had everything to due with the US
> abandoning the gold standard and investors subsequent unease with
> that decision.

Big lesson from the 1970s: let the market determine prices. Removing the last vestiges of the gold standard allowed gold to spring to a market price, just as ending unsustainable wage and price controls contributed significantly to inflation.

> We
> will see higher inflation. The FED will enact similar interest rate
> policies to the 80's to deflate the real value of their debt, gladly
> producing nominal returns in stocks, but subsequently unhinge debt
> holders whose current holdings will devalue.

No. When the Fed increases interest rates, it does so by reducing the money supply. The high inflation of the 1970s was not, in any way, caused by high interest rates.

> Those debt holders will then cash in their dollars for hard assets,
> flooding the market even further. Fueling a run on those hard assets
> (commodities, land, equipment) and also making the USD more dilluted,
> compounging the already existing inflationary pressure.

No. This would be debt (not money) being exchanged for some other asset (not money). The effect on the money supply and prices would be nil.

Aug 06 09:04 AM

[Francis Sch...:]

Technical analysis is a windsock and what we have for Gold is clearly a reversed Head and Shoulder pattern. It signals a Trend reversal; and a trend reversal we have! Remember, Gold has been going down in 2008. It lost 30%.
The HS pattern is only complete once the price break through the neckline; and the neckline happens to be $ 1,000. Having said this, note Gold in CanDollar has a very similar chart pattern and it broke the neckline of the CanDollar HS pattern in 2008.


On Aug 04 03:42 PM tedfoo wrote:

> Sigh. The head and shoulder and it's inverse are trend reversal patterns.
> This chart just looks like a head and shoulder...a false positive
> if you will. This "inverse head and shoulder" is not a trend reversal
> or a signal with a price target because gold hasn't been going down,
> it's been going up.
>
> If anything your chart is telling you that there is an ascending
> triangle with resistance at $1000. Consolidation has been taking
> place and gold is still poised to pop provided it can break the $1000
> decisively. End result is the same, but don't cheapen your article
> with fuzzy technical analysis.

Aug 06 09:26 AM