The Long Heralded Gold Correction
Arrives
Dr Richard
Appel
Jun 1, 2006
May 29, 2006 - Shortly after gold resolutely surged through
$500 with nary a backward glance, noted expert after pundit began
to board the gold correction bandwagon. At first there were a
few. But one by one, as gold drove unimpeded higher, their number
swelled. Finally, during what many of their league pronounced
a parabolic rise that was destined to terminate gold's Bull Market,
the members of the financial media turned their focus towards
constant discussions of the end-game of gold's Bull Market.
In January, 2006, the yellow metal surpassed $550. It traded
sideways for the next two months. Then, at the end of March,
its character transformed. No longer were its daily upward surges
limited to the $6 or so that characterized all but the past few
months of its six year bull run. Now, price rises of as much
as $12 to $20 dollars a day combined, and formed the resultant
180 odd dollar magnificent advance that quickly took it to $730
an ounce.
This was indeed both an exciting and substantial price rise.
But to put gold's recent ascent into perspective, I would like
to note a few somewhat similar episodes since its Bull Market's
inception. Their percentage advances were not as great as the
recent one, but they too qualified in magnitude, time, and form
as being considered parabolic. However, during these earlier
cases, the term was never mentioned.
The first was gold's climb that began shortly after it's Bull
Market emerged in August, 1999. In mid-September of that year
it staged a breath-taking +25% advance that took it from its
then $255-$260 price to $327. This occurred in less than one
month. Later, in early December, 2002, the metal soared from
$315 to $385 by February, 2003. In this brief two month instance
it ascended 22%. While these were both of lesser magnitude than
the present example, their slopes compared favorably with it
in conforming to a parabola. Yet, no one labeled them "parabolic"
because like the present case, they weren't.
For its historical precedence and to help the reader better understand
the "parabolic" concept, I will review the gold rise
from its August,1979 closing price, to its January,1980 top.
Gold began this historic and unprecedented advance at $320. In
the space of barely five months it peaked at $875. This nearly
vertical 270% price explosion was then as now, viewed as a true
parabolic rise. In fact, the last six weeks of its ascent saw
it nearly double in price from $450 to $875.
As is typical with all near vertical price rises that are true
blow-off events, it heralded the eternal metal's two decade Bear
Market. This was not unusual because genuine parabolic rises
are quite rare, and have marked the terminal phase of many a
Bull Market, across numerous markets.
Great gold price spikes such as the one encountered in 1979-1980
were unusual events, but punctuated mankind's existence. Throughout
history, when a country debased it's money for an extended period,
by issuing excessive monetary units or by "clipping their
coins" to pay their bills, its citizens eventually recognized
the reduction in purchasing power of their savings and wealth;
their assets no longer could acquire the things that they once
did. When this realization spread among their fellow countrymen,
a panic for self-preservation erupted.
The result was typically a flight from their currency. This was
witnessed by a rush to exchange the domestic money for tangible
items. The primary one was gold.
From the beginning of civilization repeated similar conditions
evolved in many different nations. This caused some obscure individual
to coin the euphemism, "there's no fever like gold fever".
Parabolic rises occur after a Bull Market finally attracts widespread
attention. Earlier, as the Bull Market gradually unfolds, numerous
investors and speculators observe from the sidelines. During
the bull's course prices continually plod higher. Then, after
substantial profits accrue to the early investors, those who
missed the move begin to panic. They berate themselves for not
having the foresight or courage to buy the market, and plunge
in headlong. This causes a price spike that attracts further
attention and additional excited buying. Finally, the price rises
nearly vertically as panic, fear, and greed simultaneously well
up in the hearts of the market's players. This, as the idea of
missing still greater imagined profits consumes much of their
waking and nighttime thoughts and dreams.
To my mind, today's gold market casts a shadow unlike that which
existed between late 1979 and January, 1980. At that time hoards
of speculators and investors from around the world threw caution
to the wind and plunged into the gold market. That was when cabbies,
barbers and waitresses were bragging of their gold profits to
anyone who would listen.
That was so unlike today! How many people do you know that have
even considered an investment in gold, let alone actually taken
an important investment position in the golden metal? I know
of literally none among my close relations. This is because unlike
1979, the public does not yet recognize gold as something important
and necessary to own. Tragically, these are the same people who
continue to follow the misguided belief that common stocks are
a form of savings!
John Q. Public has not even dipped his pinky toe into the yellow
metal's market. This will change when one day, likely several
years in the future, the public enters the gold market en masse.
Only then may we again witness a parabolic rise in the eternal
metal.
Those who label gold's recent merely explosive two month 35%
advance parabolic, should review the 1979-1980 era. Then they
will truly grasp what a parabolic gold price rise looks like.
And, only then can they imagine what it felt like for those who
were aligned either with or against its tidal force.
NO MARKET RISES UNCORRECTED
SKYWARD
Gold has completed a major
upwave in what I am confident will prove to be its greatest modern
Bull Market. If I am correct this will ultimately pale its 1970's
experience. However, this does not mean that its historic price
rise will not be interrupted with repeated sharp, frightening
reversals such as the one that we are now experiencing.
To refresh the memories of those who participated from its bull
inception, and to bring newer investors up to speed, we have
already been forced to endure a few other harrowing and confidence
testing time-frames in gold's present Bull Market. Of importance,
despite these trying and gut-wrenching down-drafts, none of these
ended the golden bull's reign.
As I stated above, gold's Bull Market was conceived at its August,
1999, $252.50 Bear Market low. After its initial stunning advance
to $327 in October, its price again withered until it formed
a double bottom at $255. This occurred in January, 2001. From
top to bottom it lost 22% before finding absolute support. Later,
in January, 2003, gold rose and struck $384. However, within
the space of two short months, the bears drove it $65 lower for
a 17% loss. Also, in March, 2004, gold posted a new bull high
at $432. Again the bears took control and, within one month in
April, overwhelmed the bulls and hammered it $60 lower to $372.
This represented a 14% loss.
Thus, the current decline from $730 to its recent $637 low should
be viewed in context as being nothing more than just another
healthy set-back. After all, this price reversal merely represents
a 13% give-back to date.
For the neophyte and seasoned "gold bugs" alike, who
do not yet understand that "all corrections whether primary,
secondary or tertiary are ultimately corrected", do not
wish for an early end to the current weakness in the eternal
metal. Rather, embrace its decline.
I do not pretend to know where gold is going in the short term.
Much damage has been temporarily done to its price structure
due to the already nearly 100 point price reversal. It may appear
surprising, but I would not be shocked if this correction tests
gold's 200 day moving average. In my opinion this will not only
be healthy, but will help extend the longevity of its Bull Market.
The 200 day average is currently at about $531. It is rising
at about a one and a half point daily rate. It is true that it
might not decline to this level. However, a move to the $550
zone, or even a brief piercing of this moving average, will allow
the excessive excitement and overzealousness that has built up
in its market to dissipate. Further, as difficult as it is now
to accept or even contemplate, this will represent a normal correction
in the context of a secular gold Bull Market! If this ensues
it will not only act to wash out all of the late-comers, trend
and momentum players, but it will set the stage for a renewed,
substantial advance from an extremely strong base.
In fact, as odd as it may sound, we should "hope" that
the present correction lasts a few months or longer! For if gold
shortly renews its skyward assault, we will likely experience
a price explosion that may yet indeed appear parabolic. In that
event, gold could easily surpass $1000 in the relatively short
term.
Yes, it will briefly give us all a great rush, a sense of euphoria,
and temporarily reward us for our foresight and courage. Unfortunately,
from a longer term perspective after the final buy order is filled,
the eternal metal will likely experience a major correction from
which we will all directly and unduly suffer.
Even if the latter scenario unfolds, gold will still not have
ended its Bull Market. It will only herald in many months of
gloom and sharply falling prices. This could have been avoided
or at least postponed had the eternal metal been allowed to now
rather than later, wring the excesses from its market.
Rest assured. If I am correct, and a drastically lower price
occurs before gold strikes its low, the eternal metal will again
resume its bull run and post new, stunning highs on the way to
its final Bull Market peak. There truly is "no fever like
gold fever". For good or for bad I believe that we will
again witness such an experience. But, it will occur far later,
in what I believe history will dub its greatest Bull Market.
The above was excerpted from
the June 2006 issue of Financial Insights © May 29,
2006.
Dr Richard
Appel
contact
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