I needed to write this post just as a way to consolidate all of my thoughts about the gold market.

I have plenty of charts and and specific things to say about those charts, but first I wanted to write about where we have been in the gold market so far and up to this point for the sake of perspective.

If you are completely new to the gold market then the next few lines of text are particularly important because they provide the important context of where we have been. ‘Where we have been’ is a very important piece of information for technical analysis because it provides data useful in predicting ‘where we are likely to go’.

Gold has been in a severe bear market for the 20 year period that begins in 1981 and ends in 2001.

This is simply a fact and you can verify it for yourself simply by looking at price charts of many popular commodity websites.

But why is this fact important? It is important because it helps to provide long term historical context about where we have been. It shows us that for a very long period of time gold had overall more selling pressure than buying pressure. It was a long painful cycle for many investors and traders because each rally, whether short or intermediate term within that period was never really sustainable and eventually sold off and hit new lows…

But the good news is that new bull markets are born out of previously painful bear markets. The new bull market in gold started in the year 2001 at the price of 257.00 .

Since that time and as of the date of this post, it has appreciated to 441.70 for a total of 71.86 percent. The 52 week high was 458.70 seen on December 2nd 2004. So the total percent gain from the lowest low to the highest high (the 52 week high) is 78.21 percent.

This 78.21 percent gain from the lows of 2001 represents bull market action. The tape action has been consistent in terms of trend strength and upside persistence.

For a little more perspective, consider that the first major leg of the gold bull run in the early 1970’s gained 442 percent. During this major first leg of that bull run the most retracement that was seen was 38 percent.

The first leg of the 1970’s bull lasted about 5 full years. That was 5 full years of strong uptrending price action. The current bull run in gold has so far given us about 4 and 1/4 years of uptrending price action.

There should be no reason for the gold run of the early 2000’s to be exactly the same as the first leg of the gold bull run in the 70’s. But the comparison is still interesting. Our current bull run, almost 5 years long has only returned 78.21 percent, whereas the 70’s first leg bull run returned 442% within a 5 year time span.

So, what does this mean for the current bull run in gold?!

A. It could mean that the current gold bull is and will be much weaker than the 1970’s gold bull in terms of price acceleration per unit of time and total percentage gain.

B. OR, it could mean that the most explosive leg of the current 2000’s gold bull run is immediately and very soon ahead of us to complete the first major bull leg!!

Option A or B is what I will continually attempt to analyze here at the Gold and Silver Trading Forum!

Thomas

During July 2004 I drew up a long term price bar chart of the gold market and I will post it here so that you too can get some good perspective on the gold market. Soon enough I will post an updated version of the chart for 2005, but for now the gold chart still helps me get my original main points across.

Here is the chart:

The 70’s Gold Bull Run
Take a look at the first part of the chart on the left side. That was the historic 1970’s bull run in gold. By the way this price chart shows YEARLY price bars in semi log scale to help keep all price percentage changes consistent regardless of price level.

The fact that this is a yearly price bar chart should be mentioned again just so you do not forget what it really means. For starters, it means we are dealing with the super long term. It also means that the details of each price bar and how it closes for the year is very important for future price prediction.

Anyhow, back to the chart.

Looking at the early 1970’s ( all the way on the bottom left of the chart, it should read ‘1970′ instead of ‘1960′) at the very beginning of the gold bull run, you can see that there was a mid-range yearly close. This type of price bar probability wise often marks some sort of turning point and directional trend change from the previously existing one.

I tend to think of this mid-range close as the real start of the bull run of the 1970’s. In price percentage terms after this mid-range close we saw a total of 4 very strong yearly price bar closes that marked the first major leg of the 70’s bull run. The percentage gains for years 1, 2, 3 and 4 were 16.5 %, 49%, 75.6% and 62% respectively.

Note that the 3rd year, the one with 75.6% gain was the best year out of all of them during the first major part of this golden bull. That was a truly powerful price move and the most ripe part of that bull run.

The 2000’s gold bull run
But what about the gold bull run of the 2000’s?

You will notice that in 2001 there exists also a mid-range yearly close. This is where the current gold bull run started. So far, years 1,2, and 3 have returned 25%, 19.5 % and 5.3% respectively. The most recent yearly price bar on this chart was drawn half way through 2004 and does not represent the close of the year 2004. The yearly close of 2004 showed us a 5.3% total gain from the previous year’s close.

The clear conclusion that I can come to right now on the basis of this comparison is that the current gold bull run compared to the 70’s gold bull run is that the current run is much slower and weaker strictly on a percentage return basis.

In other words, if the current gold bull run is in anyway going to start resembling the gold bull run of the 70’s, then it needs to start accelerating rapidly and soon with powerful price persistence and momentum.

But is there any evidence to suggest that such a powerful persistent move could be possible?

I believe there are several clues which suggest this persistent powerful move (possible on the order of 50% to 70%) could happen starting from the 3rd quarter of 2005 and running right into the end of the year. In other words, the explosive move could be set to occur over the next 6-7 months).

One of the possible clues has to do with a prediction Marty Armstrong of Princeton Economics International made in 1999. Specifically he wrote:

“In the past, every 8-year cycle in gold has produced an important low and the next target still remains 2000. A low under $252.50 next year will qualify for such an 8-year cycle event that should then be followed by a true bull market into 2007 peaking with the next Economic Confidence Model turning point. Given the fact that we have a Panic Cycle Year in 2005 and the underlying strength of our long-term momentum indicators, it would certainly appear that gold should exceed its 1980 high going into 2007.”

I will tell you more about Marty Armstrong and his cycle model in a future post over at the Stock and Commodity Trading Forum. But for now, just believe me when I tell you that this man was genious enough to come up with one of the most powerful cycle models ever that has stood the test of time.

In the quote above, Marty has said that his model shows a panic cycle in gold for the year 2005. The term panic cycle in Marty’s trading model means very high volatility and price spread, but it does not refer to which direction price movement will be. Other analysis is needed to determine likely price direction. I will do that analysis in future posts right here at the Gold and Silver Forum. It is very significant however that Marty’s model has shown 2005 to be a yearly panic cycle for gold. Not a daily, weekly, or monthly panic cycle, but a yearly one! I made this point earlier but will repeat it again. Longer time frame price bars and indicators have greater and more meaningful predictive implactions for immediate future price action.

By the way a 70% run in gold from here would put us pretty close to the old high of 800 per ounce price of gold.

I suspect that if this run gets started during the last half of this year that it will slice through the 500 resistence price level like a knife through butter.

The 400 level price resistance area was a very thick and difficult resistance (supply) area for the gold market to overcome. So far its behaviour and price action through this well defended area has been absolutely superb!

If we were still in a gold bear market, then this resistance area would have slammed gold down on its face and pushed us well under the 370 area in a violent correction. But it did not happen!

During 2004 you can see that the 2004 yearly price bar did an intra-yearly test of the support area that marks the bottom of the long trading range during the mid 1990’s.

More clues and analysis in future posts…

Including a look at recent price action and what further evidence exists to help us determine where this gold bull is going to run next…

Thomas