Earlier Wednesday, I listened to a Wells Fargo analyst on CNBC discuss what he sees as the end in Gold's (NYSEARCA:GLD) bull run and the potential for a 300 point decline in the precious metal. His rationale for such is that gold is trading within a commodity bear super cycle (which typically last 20-25 years). He believes this super cycle began in 2011. Below is a 100-year chart of gold adjusted for inflation, which illustrates a double-topping pattern in gold, which is typically considered a bearish omen.
As an analyst, and someone who relies mostly upon technical analysis as a decision support tool for entry, exit, and risk management of positions, I fully embrace the concept of cycles. However, as an economic historian and someone who does not discount the fundamentals, I do take issue with this thesis which is primarily predicated on the notion that human behavioral patterns are repetitive simply "because they are". Like most technical analysts, I do believe that price charts reflect the collective consciousness and sentiment of market participants, but I think it is also important to ask under what conditions are they exhibiting such behavior.
To illustrate my point, I have included a historical chart comparing the movement of gold to the 10-Year Treasury Constant Maturity Rate. In the example below, although the price of gold is not adjusted for inflation, its purpose is to illustrate a peak in price relative to the interest rate environment. At the time gold peaked, the economic condition was one of rampant inflation and interest rates were raised to historically high levels to combat it, which anyone who is a student of the markets will acknowledge had the intended effect of lowering inflation and the price of gold too.
In contrast to today's economic environment, inflation is not yet a problem, but instead deflation. With some $10 trillion in sovereign debt yielding negative rate returns, the US Federal Reserve will most likely defer any interest rate hikes until next year as its monetary policy must balance global economic risks stemming from China, Japan, Europe and Great Britain versus any upside or downside economic data dependent surprises. Under such conditions, gold has not only provided a safe haven, but also a competitive alternative to paper assets, e.g. bonds, which offer negative to almost zero level yields. Simply put, this time it really is different. We are in a post-recession environment with massive amounts of QE sloshing around in bubble-mania.
Not that markets are always rational, but a strong dollar and a strong bond market cannot co-exist over a long term period. Eventually, one must yield (no pun intended) to the other and I think gold and bonds are suggesting such. Currently, there is a bullish retracement occurring in gold of which it has only completed almost 38.2%. A 50% retracement could send gold even higher to $1500 (for the sake of rounding numbers), while a full 61.8% Fibonacci move takes us almost to $1600. Gold bears should "bear" in mind that I am not throwing these numbers out simply because of chart patterns dictating such, but because the underlying economic conditions and trends of global central bank policies enable such and therein lies the difference.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in GLD, GDX OR GDXJ over the next 72 hours.
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.