| The gold cycle | |
| GUEST COLUMN | | Mukul Pal / New Delhi August 25, 2008, 3:04 IST | |
The 34-year gold cycle guides liquidity flow from equity to gold, as money shifts from paper to hard assets.
Peter Cogan mentioned about the Gold crisis cycle of 34 years in his article on predetermined periodic cycles of optimism and pessimism. The 1967-68 Gold crises, which climaxed with the end of Bretton Woods system, followed the 1933-34 Gold crisis. The article written in 1969 issue of Cycles was visionary and is the only reference in nearly 70 years of Cycle literature.
But the more interesting part is that the Cycle is still valid and working. After the gold crisis of 1967-68 we saw the crisis of 2000, where people believed in technology stocks and the paper dreams they offered compared to the hard asset.
Crisis, as Chinese put it is danger with opportunity. The 2000 Gold crisis created more than a decade long opportunity. And the 34 year cycle projects the next crisis near 2030. What does this mean? This means that there is more upside on Gold to come on one side and second a majority as usual will get trapped buying Gold near 2012-2015 highs. This is how long term cycles work.
They originate from the time necessary in order that one generation has time to forget the faults of a previous one. And even if neural prosthesis embeds a memory chip in our brain, one really needs to be a good student of econohistory to understand that cycles exist not just in gold, but in interest rates, inflations, inventories, sectors, stocks and above than they are all linked.
The linkage part of cycles between assets is also a loosely knit subject and needs sizeable research inputs. Tom McClellan talked about liquidity waves in his book “Predicting the future”, where he mentioned about money flowing from gold to stocks and vice versa. Though written less than a decade back, the gold connection with stocks is not much talked about. We briefly touched the subject of metals predicting recession in our article Metals Maze (April 14), when we said Gold and other metals are strong forecasting tools for economic cycle upmoves and down moves. We even said that anticipating a recession (February 4) might be an illusion as metals do not suggest that the crisis is yet here.
We explained our case using the gold-silver ratio. To strengthen our case we talked about the direction Gold should take in the coming months. In Fools gold (April 28) we said, “Gold is not just a metal, but a predictor of recession. And the anticipated fall of the precious metal can surprise most recession watchers. Gold is ready to come down sub-$800.” On 15th August, Gold touched a low of $773, a drop of 16 per cent from the intermediate negative trend highlighted on April 14.
Gold touched a multi year primary low in August 1999 at $251 and moved sideways till April 2001 at $254. And since then it has nearly quadrupled to $1,030 without a primary fall (more than nine to twelve months). Even the current fall lacks in retracement. Now what we are discussing here is a case for further fall on Gold at least till $700 levels and potentially lower. Intermarket cycles suggest that if the 30 year commodity cycles have to push up till 2015 (fooled by simplicity, May 26), we need more than a few months of fall for commodities to regroup. So a growth and decay progression is what commodities should experience.
We wrote about this impending move down in commodities of markets and about a multi month pause in commodities and about the oil rocket (May 12) and its fateful journey lower. We have covered some ground in terms of CRB commodity index down 19 per cent since July and Oil making lows near $109, falling near 25 per cent from the $145 high registered in July. What happens now till first or second quarter 2009 is the key part.
Gold is a commodity leader more important than oil, as oil cannot replace money but gold can. Jack Sauers, Gold cyclist wrote about Gold linkage with market sectors and inflation in 1977. From the investor point of view, gold and gold stocks are looked at as being counter cyclical. That is why when the stock market peaks out and reverses trend, there is usually a rush to buy gold and gold stocks with investor funds obtained when industrial stocks are sold off as Dow Jones drops.
There is thus a strong tendency to drive gold prices and gold stocks even higher. After the low of business cycles is reached and recovery starts again, gold and gold stocks are sold off and funds reinvested.
Jack also explained why gold sometimes ignore the inflation trend of other commodities on the rising portion of business cycle. As far as the average business cycle of 41 months is concerned, copper and silver rise as the cycle increases due to industrial demand and gold decreases. Only when inflation rate is terribly high, or too apparent to the average consumer, do all metals rise simultaneously as investors lose confidence in paper money.
So the question one should ask is how terrible is this inflation? And does inflation lead commodities or vice versa. If it is a commodity linked inflation, a pause in commodity will also see a pause in inflation for a few months while the long term cycles exert themselves. The equity v/s gold cycles for Nikkei, Dow and Sensex also suggest that we are heading for seasonally positive time for equities compared to Gold.
This means that a multi month pause in equity market fall, a bear market rally beginning from cycle lows in October 2008 might be in. We mentioned about the late economic cycle and how it is linked to the 41 month Kitchen cycle. Sensex fall for the last 8 months also pushes us towards completion of the first leg down in the late economic cycle. Every cycle has three legs and the current late economic cycle should complete sometime in 2011-2012.
From a market sentiment point of view, confidence crisis are also of various degrees. First is the crisis linked with earning expectations; second is a political crisis (like we are witnessing in Pakistan); third is a regional or local currency crisis; fourth is a global financial crisis (subprime). Only after this the economy faces a cash crisis when there is a flight of money from paper to hard assets like gold and metals. Markets don’t just bounce from one crisis of lower degree to a larger one immediately.
Though this can happen, easing commodity prices belie that fear. We have been crying recession for almost a year now and the DOW remains unflappable near 12,000 (barely 15 per cent down). In conclusion, the current negativity on Gold prices should push prices lower for more than a few months. This should accompany the other commodities, including oil. The countercyclical effect of this should be seen in equities around the world with markets rising for more than a few quarters around the world.
And when complacency will return that recession has been averted, the next leg up on Gold, up till 2015 should begin. Global recession does not come just because we are waiting, it will come in due time, when Gold cycles and other intermarket cycles signal.
The author is CEO, Orpheus CAPITALS, a global alternative research firm
|
Content Guide
