Gold's Next Bull Market Has Begun

Gold just broke its “neckline.”

If you’ll recall, in August I wrote about the massive inverse head and shoulders pattern gold had formed during the last three years. I presented the below chart to illustrate this:

At the time I wrote:

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.

Well, last week, gold broke the neckline:

As you can see, gold’s recent rally took it above the critical point of upward resistance. This indicates that the next leg up in the gold bull market has begun. The reason here is simple: investors have begun to realize that every central bank on the planet is hell bent on devaluing their currencies.

Interestingly, this new breakout corresponds perfectly with historic trends. As I wrote in August:

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).

Everyone and their mother believes the Fed’s actions are hurting the US dollar. But few people have taken noticed that the Europeans don’t want a strong euro, just as the Japanese don’t want a strong yen, just as the Swiss don’t want a strong franc.

Why?

None of these guys want their currencies to appreciate too far against the dollar because most if not ALL of them export to the US or trade products based in dollars. Having a strong currency against a weak dollar means increased production costs against a lower sales price. This means lower profitability.

To combat this, countries are either aggressively printing money to stimulate their economies (China, Europe, the UK) or openly manipulating their currencies (Switzerland) in an effort to devalue their money against the dollar. Case in point, this latest breakout in gold happened without the dollar falling to a new low:

As you can see, gold broke out dramatically this week, but the dollar failed to fall to a new low. This tells us that gold is beginning to decouple from the dollar and is soaring as investors the world over flee paper money in general. And of course, they’re piling into the one currency that cannot be devalued: gold.

So where will the precious metal go from here? The above head and shoulders pattern forecasts a move to $1,300. But if we truly get gold mania (as we did in the late ‘70s) gold could rise 750% (that was how high gold rallied from August ’76 to January 1980 during the last gold bull market).

If gold were to rally 750% from its recent low of $700, that would put the precious metal at $5,250 per ounce.

I know, the idea of gold above $5,000 an ounce seems ridiculous to me, too. But gold has produced these kinds of returns before. And with virtually every central bank on the planet printing money in an effort to stimulate their economies, it’s not hard to see how gold mania could push the precious metal to prices that seem outlandish today.

In light of this, I suggest having some exposure to the precious metal. Gold’s had a wild ride since 2000, but if this gold bull market continues to mirror that of the ‘70s (as it has so far) then we’re in for some real fireworks in the next couple of years.

Comments

[Macro_Man:]

Gold did not have a good day today, reversal day. Perhaps this is just the first of many...perhaps this is the top. But, there is a lot of distribution mate and looks like the big boys are getting out.

Oct 14 04:09 PM

[Robert Mart...:]

Omnisans:

A weak dollar is de facto government policy, and loose monetary policy world-wide makes gold a very good hedge.

While it's hard to imagine gold at $5,000+, lots of things have happened in the last 18 months that were MUCH harder to imagine. When the investment environment feels like "Alice in 'Wonderland', you have to imitate the Red Queen, and "imagine six impossible things before breakfast." www.gap-system.org/~history/Quotations/D...

A client recently countered my bullish argument for gold, saying: "If the dollar is weak, and other currencies are nearly as weak, then it all evens out." Why worry about a weak currency if everybody is doing it?

Why? Global inflation. Even if currencies are a zero-sum game, investing is not. Right now, I believe all investors need to actively hedge against inflation and dollar weakness. Gold makes a lot of sense, as I noted in "Inflation Protection: What's Working and What's Not seekingalpha.com/artic... The only inflation hedge that is NOT working is the TLT, which shorts the 20-year bond. Government bonds are defying gravity because the Fed is using quant easing to support the Treasury market.

As the global devaluation of currencies continues, commodities and hard assets will grow much more expensive in $ terms. This will exacerbate inflation for the struggling American workforce, which I detail in "The Deflation of the American Dream" seekingalpha.com/artic...

This is a bleak article, so I suggest following it up with "Rebuilding the American Dream", if only for the cartoon at the beginning. : ) seekingalpha.com/insta...
Rob

Oct 14 04:19 PM

[jamup:]

I am just as afraid of gold as i am Obama .

Oct 14 04:44 PM

[Kristjan Ve...:]

For those that don't know or haven't kept track of the news, 4assetmanagement will soon be out with a JUNIOR gold miners' ETF. Talk about a bull market, these stocks will go berserk once the money starts rolling in: www.kristjanvelbri.com...

Oct 14 05:17 PM

[The Geoffster:]

If you treat gold as currency (money), you won't worry about head and shoulders or pert plus for that matter. Gold hasn't changed in thousands of years. Just compare its purchasing power with whatever currency you are buying it with and that will tell you what its value is.

Oct 14 08:48 PM

[JeffDB:]

On Oct 14 04:19 PM Robert Martorana wrote:

> A weak dollar is de facto government policy, and loose monetary policy world-wide makes gold a very good hedge. ...>

That's my take on it, and apparently a lot of other people's as well:

www.forbes.com/2009/10...

"Judging from the increased inquiries that Rosland Capital, a precious metals asset management firm that typically works with middle- to upper-income individual investors and high net-worth clients, has received about gold, such reassurance is currently in high demand.

"There's rising anxiety about budget deficits, U.S. dollar weakness, inflation and the staying power of recent stock market strength. It's driving investors to gold whether as a hedge, as insurance, as a diversifier or because they don't trust the government," Nichols said. He sees gold doubling or tripling in price in the next two to three years--not only because of continued quantitative easing and mounting budget deficits but also because increased gold investment is a global phenomenon. ...

Oct 15 12:08 AM

[TheFounder:]

Adjusated for inflation, the gold top price from the 80's, is, in todays dollars, equal to approximately $2500.

With all the current hype, governments buying gold, so many investors still NOT in gold, the possible technical support at $1000, the downside at this point seems limited to 5% or so. The upside is as the article points out - significant.

As more and more people will do this type of analysis, the uptrend is likely to continue.

Oct 15 02:19 AM

[djj420:]

I'm a long term gold, silver & oil bull/US$ bear, but the PM trades have gone parabolic lately (and in the case of PAAS may have already reversed). I lightened up my mining positions earlier this week, as the trades had obviously gotten really crowded. When everybody and their mother is buying PM's, it's almost certain there will soon be a pullback to shake out the weaker longs and the Johnny-Come-Latelys. The time to buy PM's is when nobody wants them.

But the US$ is about to collapse, you say? Probably not anytime too soon. Markets tend to surprise the masses, and the real death throes of the US$ probably will begin at some point following a period of relative strength. To borrow an analogy from another recent SA article: every train that seems like the last train out will not be the real one- the real last train will leave the station quietly with no fanfare.

Oct 15 08:56 AM

[sorgmot:]

cnbc cheers for DJIA.

At $1,100 in year 2000 and $1,000 in October, 2009, the DJIA is down 10%. In gold ounces it could buy, it is down 70%.

This makes USA paper investments a disaster.

It makes USA Government a disaster.

Good Luck.

Oct 15 10:35 AM

[Robert Mart...:]

Jeff,

I would add this: The decline in the U.S. dollar is evident to many investors, and hedge funds are riding this horse all the way to the bank. As more investors pile into this trade, the U.S. dollar could have a sharp break downward.
Everyone is counting on an orderly decline, since China and other nations are "in this with us". What if China threatens the U.S. with a Treasury embargo? What if a downgrade in U.K. government debt triggers a de facto downgrade in U.S. government debt (via a spike in yields)
All told, an orderly decline is NOT a given. In fact, the history of capital markets suggests that a burst of panic selling is likely before we hit bottom.
Thanks for your comments.
Rob

On Oct 15 12:08 AM JeffDB wrote:

> On Oct 14 04:19 PM Robert Martorana wrote:

Oct 15 02:39 PM

[Keer-eh Khar:]

Article states: "If gold were to rally 750% from its recent low of $700, that would put the precious metal at $5,250 ... I suggest having some exposure to the precious metal. "

You think that Gold will go to $5000 and then you suggest "some" exposure to precious metals? Ddduhh! Hello? Anyone home?

Also, the title of your article is "stale" by at least 5-years as the bull market in gold had already started back then.

In short: give me a break, and don't tell me stuff I have known for the past 5 years!

Oct 15 08:03 PM