Gold bullion – is a cycle low imminent?

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In what is probably an overdue correction after a stellar performance (+29.6%) during 2010, gold bullion has declined by 6.0% since the turn of the year. However, with the turmoil in Egypt as catalyst, the yellow metal sharply reversed course on Friday from an intraday low of $1,308.10 to close the week at $1,335.40.

The question that invariably comes to mind is whether we have seen the worst of gold’s decline. A few comments from Richard Russell, author of the Dow Theory Letters, regarding cycles are of particular interest.

“Analysts are talking about gold correcting down to 1,200 or even 1,000. However, I believe that the more important picture is that the gold bull market has much further to go on the upside. I’ve been reading the McClellan Market report for years. McClellan does a good deal of research on cycles, and I must say some of its cycle studies work out quite well.

“McClellan has discovered that a cycle low appears for gold roughly every 12.5 months. The cycle lows have run as follows: Jan 6, ’06, Jan 8, ’07, Jan 7, ’08, Jan 5, ’09, Jan. 4, ’10, Jan. 8, ’11. McClellan puts the next cycle bottom for gold at February 8, 2011 which means it should arrive at any time between now and February 8, give or take a few weeks before or after that date.

“Interestingly, the McClellan cycle bottom for gold is due to arrive amid a good deal of professional bearishness regarding gold. Thus many traders have traded out of their gold positions, just as we near the date for the McClellan cycle bottom.”

The red arrows in the chart below mark the McClellan cycle lows.


Separately, Adam Hewison ( also provided a brief video analysis on the technical outlook for gold, arguing that a buy signal has not been given but that gold see a pop to the upside. Click here to access the presentation.

Although it is difficult to pinpoint short-term bottoms, I am of the opinion that the gold bull market remains intact, especially with inflation blowing up all around the world. Meanwhile, China and a number of other Asian countries keep adding gold to their reserves. These purchases should provide a floor to price declines – an “Asian put” so to speak.

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