Gold bullion: avoid or accumulate?

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The gold price has experienced a rather precipitous decline of 6,7% since its recent peak of $691,7 on 20 April 2007. This correction is considerably larger that the drop in the prices of commodities in general as well as the increase in the value of the dollar from about the same time. This begs the question whether we are experiencing a normal bull market correction or perhaps the start of a more ominous longer term-trend reversal.

In order to gauge bullion’s action, it is useful to look at how the historical picture stacks up. The following chart (originally devised by www.ZealLLC.com and adapted by Plexus Asset Management) shows the three stages of a typical gold cycle as experienced from 1971 to 1980, while overlaying the present cycle on the same axes.  

 stages-of-a-typical-gold-cycle2.jpg

Analyzing the 1971 to 1980 gold bull market, price data show that the first phase from 1971 to 1973 was largely on the back of a weakening dollar, whereas the period from 1974 to 1978 saw increased investment demand, with gold rising in all currencies.

It would appear that we are seeing similar action in the gold market in the current cycle. Although we are all quite familiar with the movements of the dollar gold price, the trend of gold expressed in other currencies receives far less publicity. The following graph and table clearly illustrate that, irrespective of its recent decline, bullion has been making solid headway since the middle of 2005 in most major (and minor) currencies.

3-gold-price-in-various-currencies.jpg

  

These are good numbers, but what is their significance? Simply that the bull market in gold that commenced in 2001 goes beyond being only a reflection of dollar weakness. The fact that bullion is rising in all currencies probably points to two aspects, namely: (1) an increasing despondency with paper money, and (2) rising global investment demand for the yellow metal, including more than a modicum of interest from central banks starting to spread their US dollar foreign reserves around.

The final phase of the previous bull market (1979 and 1980) of course witnessed widespread speculative mania propelling gold all the way to a short-lived peak of $850, followed by a 21-year bear market (to eventually bottom at $250 in 2001).

Although the stage where “every man and his dog” start chasing bullion is probably still a while away, it will not surprise me to see the current bull market assuming “bubble” proportions at some stage and eventually “blowing off” – like bull market tops often do before reversing direction.

In my assessment bullion is experiencing a normal bull market reprise and is set to resume its upward path in due course, albeit in fits and starts. The exact nature of the tailwind pushing gold northwards (be it economic or socio-political) will probably only become apparent after the fact – as has so often been the case in the past.

I am watching the gold stocks carefully and will post a few comments about that as events unfold over the next few days.

More on this topic (What's this?)
Has Gold & Silver Finally Bottomed?
Gold Price Gravitating Lower Towards $1000
Read more on Gold, Metals at Wikinvest
OverSeas Radio Network

13 comments to Gold bullion: avoid or accumulate?

  • Interesting — I wish we had more examples of the Gold cycle — that would add to any broad conclusions we could draw that Gold runs are cyclical in nature.

  • whitebear

    Well. Gold and gold stocks are exhibiting negative divergence with the market. When the market was booming in May, gold and gold stocks went the other way. Now, the broad market begins to correct and gold and gold stocks follow them into the abyss. The so-called flight-to-quality during market crashes have resulted in gold going down 10, 15 bucks in an instant.

  • robert brown

    dear sir, i enjoy your letters, passed on to me by friends….would you kindly place me onto you emailing list? thank you.

  • Ulli

    Dear Prieur,
    I enjoyed some of your writings delivered by the out-of-the-box publication by John Mauldin. Could you pls add me to your mailing list. Keep this interesting work on. All the best from Germany,
    Ulli

  • David

    I find your articles stimulating. Thank you, and please do continue. I would appreciate receiving your superb commentary via email. Regards, David.

  • […] It was precisely this “big picture” framework that I tried to get a grip on in last week’s article on […]

  • David C. Jones

    This is an interesting perspective that has been paralelled in a few other eletter publications and I think you are spot on.

    Thank you for the insight and please add me to you elist for future letters.

    Best regards,

    David

  • mark Bonnington

    Read with interest your bullion article,via link from John Maulder.
    Look forward to hearing your views.

    Regard

    Mark

  • Daniel Noiles

    Sir:

    Your perspective and analysis separates you from the crowd and is much appreciated. I look forward to reading more of it. Please add me to your email recipients list. And thank you.

  • Robin Smith

    Interesting article.
    But why not include Australia (a major gold producing country) in your analysis of the movement of the gold price in various currencies?

  • Neil Wallace

    Hi Prieur,
    I am a regular John Mauldin reader and met you at his presentation in Durban earlier this year. Now I can see I will be a regular reader of your Blog.I agree that the gold Bull has a long way to go but hanging in there ,especially with the SA mining houses, will take a lot of faith.
    Thanks for the clear thinking and easy to read info, the video clips are great!
    Regards,
    Neil

  • nice graph and explanation.

    just by adjusting for inflation, i expect gold to hit $2400/Oz.

    can you explain how you got the numbers of the right side of the graph?(ie, the $3000/Oz number).

  • […] present, i.e. the so-called second phase of a typical gold bull market cycle – see posting “Gold bullion: avoid or accumulate“, June 11, […]

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