Taking Stock of the Secular Bull Market in Gold

| About: Randgold Resources (GOLD)

In early 2001, US and European stock markets were in the early stages of a secular bear market that continues today. In response to the deflationary pressures that accompanied the onset of the secular bear, the central banks of the world engaged in an obligatory campaign of monetary inflation, and the latest secular bull market in gold was born. After bottoming at 7.78 on February 20, 2001, the Gold Currency Index (which tracks the intrinsic value of gold as an international currency itself) has now gained nearly 300% over the past nine years for an annual compound return of 16%. The monthly GCI chart displays a powerful, nearly uninterrupted secular advance.

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The rally started slowly, grinding higher until late 2005, at which point the uptrend accelerated and momentum moved up to a new plateau. The most recent long-term breakout has caused momentum to rise sharply to another new high, indicating that the secular uptrend is very strong at the moment. There has been nothing remotely resembling a cyclical downtrend, and most corrections have been relatively shallow. Even the sharp decline in late 2008 barely managed to venture down into the lower Bollinger band.

Investors who recognized the developing turn early last decade have realized significant gains, but the important question now is: where is the bull likely to head next? At nearly 50% above its 60-month moving average, the GCI secular uptrend is advancing at an extremely fast pace and testing the upper bounds of sustainability. Given the fact that no substantial corrections have yet occurred since the bull began in 2001, it is reasonable to expect one to develop at some point, perhaps resulting in a pullback to that strong support at the 60-month moving average. However, predicting the timing of such a correction is exceedingly difficult, especially given the current momentum underlying the move.

Gold skeptics have been attempting to pick tops since 2003, and most speculators who have shorted this powerful bull along the way have not had an easy time. Additionally, given the historic campaigns of monetary inflation that continue today, our expectations are that price and asset inflation will very likely play a major role later on this decade, so we believe the gold bull will ultimately terminate at a much higher level many years from now. Thus, we would view any potential correction over the next couple of years as a long-term buying opportunity.

Disclosure: Author is long SGOL