Gold, Cycles and Making Money or What's love got to do with it!

March 10, 1997

Summary:

The probabilities are high for a year long, and possibly more, rally of significance in gold shares and gold bullion (though we might see an abortion similar to 1993 when the shares continue up for a further 5 months after bullion tops out). The CRB appears to have made a fundamental trend change from bear to bull in 1986 with a successful retest in 1992-3. If this is the case I would expect to see the CRB continue higher well into 1998 and possibly beyond, before anything nasty develops. There appears to be a 12 year cycle from top to bottom and bottom to top in both the CRB and gold. Not shown on the charts the CRB made an important low in 1968 and then rallied for 12 years followed by a 12 year decline into 1992 for a retest of the 1986 low. There appears to be an overlapping of markets as the bull market in the CRB appears to have started in 1986 which suggests if the 12 year cycle is still valid, an important high should be expected in the 1998 time period. The gold market also seems to be susceptible to this same cycle making an important mark in March of 1968 and then also rallying for 12 years. Do your own counts from various time periods. It should be noted that in bull markets the CRB tends to top out well after gold and gold shares.

One caveat: it is possible that the 1988-92 pattern is repeating in the gold shares, (1994-98). If this is the case the CRB would be expected to breakdown and gold in other currencies as well. There is at this time nothing to suggest that this is the case, indeed the opposite would appear to be underway.

For Better or Verse: Personal Musings about Cycles in the Gold Markets

Rather than take my word for it have look at the charts, print them out if you can, and make up you own mind. Like any good tour guide I will attempt to provide the fruits of my own observations gleaned from walking between the lines.

These charts make a couple of points that should be taken to heart. I have used Homestake Mining rather than some collective index like the XAU because HM has been around since the 19th century and typifies what happens to gold shares when gold moves up, down or sideways. Placer-Dome is another useful company to use as proxy for gold. The XAU is too susceptible to recalibration, so I always view with it with jaundiced eye. Note: the horizontal lines drawn upon the HM chart are all the same length, about 36 months.

As has been stated before, Aurophile, et.al., though gold bullion spiked to its century high, thus far, in early 1980, about the time the Hunt brothers were getting a lesson in power vs. wealth, the high for commodities in general (CRB) and gold stocks in particular did not occur until September of that same year. Indeed, the HM chart drives home that point ever so clearly. The next point in time I would draw to your attention is the disparity between the mid 1980's low in bullion and the lag which was exhibited in both the CRB and HM mining. In fact over a year elapsed before they put in bottoms from which a year long and more rally commenced. The 1985 low in bullion, I think, was largely attributable to the meteoric rise in the US dollar going into the Plaza Accord in March of 1985 when it was decided to inflate (debase) the buck fast. A quick perusal of the charts depicting gold in various currencies will further make this point. Only the Canadian dollar, largely a minor in-house variation of its southern neighbor bottomed at the same time. All of the of the Euro currencies bottomed along with CRB and the gold share in 1986.

The yen on the other hand seems to have emerged from the plaza accord with very different marching orders. In real terms though it did not show up in the Nikkei till 1990, the Japanese currency began a steady and relentless deflation (increasing its value in real terms, gold), which only now over 12 years later may have ended. It should be remembered if the Nikkei drops much below the 15,000 level much of the Japanese financial system goes with it. However, that is not to say it won't, only that the stakes are enormous for the rest of the world because Japan is, as a result of the Plaza Accord, the "house" and all of the rest of us are merely recipients. The opposite of what happened in Mexico in 1995. Quite simply if Japan deflates much further, for any reason, the G-7 simply may not have the resources to extend as they did to Mexico. In fact it will be Japan repatriating capital which they have extended to shore up the rest of us for these past several years. There does not appear to be any candidates on the horizon ready to fill Japan's shoes as head croupier in the event something unseemly occurs.

It should be noted that most of the late 1970's rally in gold occurred from early 1979 till early 1980. In US dollar terms most or all of this spike was retraced by the middle of 1982 and certainly by 1985. For the Euro currencies it took all the way to 1992 to accomplish the same goal. For Japan this occurred in 1993-4 with an overstep in 1995. This suggests to me 3 things. Firstly, that the US (and Canadian) economies and financial systems took the lead from 1980-85 in deflating the worlds monetary system in an attempt to restore confidence in managed money. Because of the sheer size of the US economy after 1985 it took the combined efforts of both Europeans (collectively) and Japan to continue the work the US had begun. It would appear the bulk of this spade work was accomplished by the end of 1992. Japan, however, because of truly astounding financial excesses has not responded according to plan.

Gold has now turned up in all major currencies, even in yen it would appear.

Have a look at the chart containing HM mining. I have drawn 4 horizontal lines each the same length. Since the 1976 bottom in bullion, the first bottom when all the industrialized nations citizens were free to buy and sell the stuff there has occurred a curious pattern in the trading of HM mining. 4 periods, the first of which formed a bottomed and then remained quiescent for 36 months followed by year long (slightly more) rally in the share. The other 3 lines demonstrate 2 year long rallies sandwiched by a 36 month decline. Of course what's past is not always prologue which is why I have included a chart of the CRB index. If the CRB rallies HM will confirm. Gold will follow or lead. In the entire period depicted on this HM chart no decline has ever lasted more than the period shown. The enormous volume on the downside in late 1996 followed by the February rally would seem to confirm this thesis.

Gold is the world’s oldest and most known currency.