Gold has been in a bull market for over a decade, posting positive returns for 11 years in a row. However, there are good reasons to believe that gold will retreat in 2012 and disappoint a lot of gold bugs.
Secular bull markets typically last between 15 to 20 years, with 17 years being the average. Historical data support the idea that equities and commodities go from a bull market to a bear market in equally long intervals. For example, a bull market in commodities has typically meant a bear market in equities and vice versa.
However, the 13th year of a bull market has typically been a year of weakness and retreat. Martin Armstrong points out that secular bull markets typically have a correction around the 13th year, and he refers to this phenomenon as the "13 year curse." He illustrates this 13 year curse with historical data from the Dow Jones and other commodity markets in a paper he recently published.
Gold has been in a long bull market and we are now in or just passing the 13th year, depending on whether we start counting in 1999 when gold made its low or year 2000 when the Nasdaq peaked. The chart shows the year over year return in gold since year 1999.
A retreat in the price of gold does not mean that it's the end of the bull market, but rather that gold is taking a breather to build a base for the next breakout. Gold has already made new highs 11 years in a row. A correction at this point is actually a healthy process, and only makes the bull market last that much longer.
Gold made a 20% correction at the end of 2011, and if you look at historical corrections, it has previously taken anywhere from 68 to 78 weeks to make a new high and stay above the old high after a similar magnitude correction. Given that gold peaked out on September 6, 2011, a new high will not be reached until around December o2012 to March of 2013, if we use historical data as our only measurement tool. Given that this is an election year, we are perhaps likely to see more intervention by the authorities to boost the economy and suppress the price of gold.
The chart show previous corrections in the gold bull market:
Despite what may be temporary weakness, I don't suggest anyone to sell their gold. Quite the opposite; gold is still in a secular bull market and any weakness represents a buying opportunity. The bull market in gold should still have several years left to run. If we use a traditional model for looking at a bull market we should be about two thirds in to the bull market; right in the middle of the "awareness phase."
Before this market really starts to take off, we need to get Wall Street and more institutional buyers involved, most of which have been sitting on the side line. But we will not see the mania phase until the public gets involved, and we are still far away from this happening. Martin Armstrong said in an interview on financial sense that he believes that gold will get to the blow-off phase in 2017, but only time will tell if this is the case or not. The chart shows a sketch of a typical bull market and a guess on where we are today:
It's in our human nature to want to see constantly rising prices to make us feel good. But unfortunately the market does not operate like that. It "climbs a wall of worry" and shakes out all the weak hands. Only the investors with determination, patience and an understanding of bull and bear markets will be able to ride out the ups and down throughout the bull market and reap maximum rewards.
I suggest retail investors to buy the dips or perhaps take the emotions aside by purchasing metal on a set date every month on a dollar cost average basis. In absence of physical metal Central Fund of Canada (NYSEMKT:CEF) is a good substitute, and to a lesser extent, SPDR Gold Trust (NYSEARCA:GLD).
Disclosure: I am long GLD.