Technical observations of RossClark@shaw.ca
Forty years ago the Dow Industrials reached 1,000 for the first time. It spent the next sixteen years in a broad trading range before it was capable of clearing that hurdle. Gold peaked twentyfive years ago at $850 and for the past twenty-three years it has been capped at $500. In both cases the market went from a point of euphoria and overvaluation to that of undervaluation. At $500, gold still appears undervalued relative to each significant high since 1972.
Holders of both investments suffered a significant loss of purchasing power during those two decades of consolidation. In the case of the Dow this was partially offset by dividends (3% to 7% from 1966 through 1983). Including un-invested dividends it took until 1986 to achieve the purchasing power of 1966. Excluding dividends, it took until 1995 for the Dow to make new "real" highs.
At $500, gold's real price (as deflated by the CPI) is still lower than the peak of every rally since 1972. It would take a nominal gold price of $860 to match the deflated $500 high of 1987 and $1,020 to match the $510 seen in 1982. In order to test the 1980 high of $850 the nominal value would need to trade at $2,177.
When we view the deflated prices of both markets some important correlations become evident. Following the Second World War the Dow staged a rally from 1949 through 1966. The ensuing bear market into 1982 produced failed rallies (labeled 4, 6 & 8) that tested the same highs seen during the bull market. The gold rally from 1969 to 1980 and ensuing bear market into 2001 saw the same style of rallies that failed at the highs of the 1970s.
Gold's current bull market has produced a peak (point 10) above point 8 and undergone a 23- month consolidation as was experienced in the Dow of 1983-1985.
Our gold/commodities index (GCI) set a cyclical high of 255 in June, 2003 and ended its cyclical bear at 185 in June, 2005.
It is in a solid uptrend, which we have labeled as a cyclical bull market that could run into mid- 2007 and make a 50% gain.
On the first cyclical bull market from October, 2000, our gold/commodities index gained 35% from 189 to 255. With that, the HUI soared 600% to 252 in December, 2003.
Obviously, a 50% gain for the GCI would accomplish a huge bull market for the stocks.
The depth of the last two years consolidation was more pronounced in the XAU and HUI mining indices, but has now been followed by a breakout of the major resistance lines. Look for resistance in the XAU at 150 and then 200.
The Battle at $500
On a shorter term basis the battle at the psychological $500 level is similar to those seen at previous 00's. We should see a punch through here (ideally to $525+) followed by a correction of three to eight weeks. The correction will likely produce a decline in the RSI(14) of 35 to 40 points and provide the next lower risk entry point.
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