In a nutshell, this week we decided to provide you with the analysis of the
previous bull market in the precious metals. The goal is to see how the current
bull market compares with the previous one. After all, since history rhymes,
looking at the analogy should provide us with clues as to what can happen next.
In particular, we will be able to estimate if we’re currently on a verge of the
final parabolic upswing and if this bull market is likely to end soon.
The above chart presents the DJIA:Gold ratio in two time spans: 1950-85 (red
line) and 1999-2011 (golden line). The 1999-2011 has been superimposed on the
older data. The chart points to the fact that in the period between 1965 and
1975 the ratio had been falling roughly in the same way it did between 1999 and
2011. We live in a globalized world, so looking at gold’s price relative to
stocks might be more appropriate for long-term tendencies than a look at the
gold price itself, simply because the major shift in investor’s sentiment
happens when investors prefer gold to the most popular investment class –
stocks.
The methodology here is, therefore, to compare the decline in the DJIA:Gold
ratio around the 70’s bull market and compare it to the decline seen in the more
recent years. Things to look at include the size of the decline, the time it
took before the decline ended and the overall shape of the downswing.
As far as the size of the decline is concerned – in both: time and range –
the slide seems far from being over – which means that the bull market in the
precious metals is likely to continue. The analysis of shape confirms that both
bull markets are indeed similar. However, the most interesting implication is
based on the late 1974 rally in the ratio.
As we see that 1974 and 1975 marked a significant trend reversal, we might
expect a similar move to happen in the near future. This would imply a
significant correction in the precious metals sector and possible rallies in the
general stock market before the precious metals sector regains its strength and
continues moving up.
Clearly, this is not the time to stop paying attention to warning signs about
a possible decline in the precious metals. Let’s take a look at the gold
chart.
In the chart above, you see the price path of gold in the years 1999-2011
(golden line) superimposed over gold’s price path between 1950 and 1985 (red
line). The vertical axis represents the older data while the values of the
recent data have been rescaled to properly reflect the corresponding price
changes. After a short comparison you might notice that today gold seems to be
in a similar situation to where it was in 1975. This would suggest that we are
in for a significant correction in the precious metals sector before the bull
market resumes. It would also imply that any correction seen in the following
month would not end the current bull.
The above chart is similar to the previous one, except for the fact that it
presents silver, not gold. Once again, the current bull (green line) has been
superimposed over the price path between 1950 and 1985. Even though the price
paths here are less similar than in previous cases, they still point to the fact
that the silver rally might be followed by a substantial short-term correction
or at least by a sideway trend. Just as in the previous cases, this should not
be perceived as the end of the current bull.
Summing up, there will be a time gold and silver move straight up without any
corrections, but analysis of the previous bull market suggests that this moment
is still years from today. Moreover, this is not the time to stop paying
attention to signals indicating a significant correction around the corner.
Finally, this is not the time to stop trading the precious metals market (in
general).
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