Behind every movement of all prices is a cycle or confluence of cycles. Some of these cycles may be in the ascending phase, thus producing a bull market, and some may be in the descending phase, resulting in a bear market. In some cases, a cross-current effect of many cycles coming together in different phases often produces sideways movement. But propelling every actively traded commodity is a major cycle, or "supercycle," either in its ascending phase or descending phase.
The word cycle is taken from a word which has as its etymological meaning "circle." Thus, a cycle is a circle. Properly defined, a cycle is a displacement of an object returning to its point of origin. Every completed cycle begets a new one. Yet before a new cycle can get underway and act as a propelling force to market prices it must have what we might call a "galvanizing force," that is, something to put prices in motion. A cycle bottom-which answers to an ending bear market-in and of itself is not sufficient to ensure the creation of a new bull market. Stated colloquially, that the "worse is over" does not necessarily entail that the good times are about to begin. Rather, something must act as the activating force to allow the new cycle to carry prices higher. If this galvanizing force is not forthcoming there can be no hope of higher prices, only of prolonged sideways movement.
Take, as an example of this principle, the nation of Japan. The Japanese stock market soared in the 1970s and 1980s, only to crash in 1989. Throughout the decade of the 1990s, Japan endured a grinding economic recession and continuous stock market decline. Since 10 years is, on balance, the longest average length of an economic depression, one would expect Japan's bear market to be over by now. Yet the island is no closer to being out of recession now than it was 10 years ago when it first began. Clearly, Japan's down-cycle has bottomed. Yet without a galvanizing force to kick the economy into the upward curve of the incipient up-cycle, she will never again experience a bull market.
Galvanizing force in the markets can emanate from a variety of sources. It may proceed from a sudden infusion of liquidity from a central bank, a commercial institution, or some other organized interest. Or it may come from a heightened interest among the masses of investors. But come it must, else price movements can be expected to do no more than meander in sideways fashion.
That gold has bottomed after its severe 20-year bear market is made plainly evident by the many broken lines of supply (i.e., "trendlines") on its chart, as well as the relative positions of its more important long-term cycles. But the question remains: from whence will its galvanizing force proceed? What impetus will ultimately force gold prices out of its long-term trading range and back into an upward trend? The answer to this question is quite simple and obvious: gold's fortunes will rise as the equity market's fortunes fall. The unfolding worldwide debt collapse, in other words, will provide the galvanizing force behind gold's next bull market.
Gold, unlike any other equity or commodity in the world, has inherent value. That is, it has demand for its own sake, both as a consumption good and as a monetary unit. It has industrial uses as well as monetary uses. In the late 1970s its short-lived popularity was based solely on the rapidly diminishing value of the dollar due to runaway inflation. Investors flocked to gold, not so much for its safe-haven status or intrinsic value, but as a hedge to escape hyper-inflation. In our present economic environment, gold's true purpose will soon come to the fore as millions of investors worldwide finally see it for what it was meant for: as a protection from the ravages of a centrally-controlled economy (all of which are crumbling as we write) and as the ultimate form of economic exchange and monetary value. Gold will soon come into its own.
W.D. Gann, one of the greatest market technicians and cycle theorists who ever wrote on the subject, noted that there is a recurring investor panic or severe depression every 20 years or so, brought about by investor panic and loss of confidence. Typically, this coincides with marked activity in the gold market as investors rush into the safety of physical gold as paper securities collapse all around them. It has been exactly 20 years since we last witnessed a major investor panic in the face of runaway inflation and extraordinarily high interest rates. We are due a repetition of that same cycle.
Wrote Gann: "Various causes have produced these different panics, but the real basis behind all of them has been the money market. The banks, having become overloaded with loans during periods of prosperity, forced selling and produced the panic." Had Gann been writing of our own time he could not have been any more accurate.
The approaching financial tsunami cannot be stopped. Men may build sea walls to protect against the incessant beating of the tides; ocean currents can be divested of their strength somewhat through the construction of reefs and barriers, but a tidal wave cannot be stopped. Though the central banks and governments of the world put forth their best efforts at stemming the tide of the now-approaching financial collapse, they will utterly fail. They have not the force of the upward trends in their favor this time; the trendlines have been broken, the trend is now down.
Organized intervention can only succeed when the trend is up; in bear markets it only succeeds in making matters worse since it provides more fuel for the downside. As the goal of the bear is to wipe out as much capital and to inflict as much damage as possible, all efforts at reversing the tide will only backfire.
At long last the moment gold advocates around the world have been waiting for has arrived. It is a once-in-a-lifetime opportunity not to be missed. Make sure you are prepared for the long ride up that lies ahead.
Clif Droke is editor of the weekly Leading Indicators newsletter, covering the U.S. equities market outlook from a technical perspective as well as the general economic outlook. He is the author of the recently published book, Technical Analysis Simplified. For a free sample issue of Leading Indicators, send name and mailing address to firstname.lastname@example.org or mail to: Leading Indicators, 816 Easely St., #411, Silver Spring, MD 20910.
23 October 2000