Over many decades, commodities rallies have exhibited 50% retracements (bear markets) before resuming their long-term upward trends based on the slow, steady devaluation of the fiat currency in which the commodities are priced.
Using the $252 price from August 1999 as a baseline and referencing the September 2011 peak price of $1,900 per ounce, gold gained $1,648 per ounce in the bull market. A 50% retracement of that 12-year rally means a decline of $824 per ounce (i.e., 50% of the $1,648-per-ounce gain), which would put gold at $1,076 per ounce.
Guess where gold bottomed?
It bottomed at $1,051 per ounce, within 2% of the 50% retracement target. That decline is an almost perfect technical retracement.
By itself, this pattern proves nothing without additional confirmatory evidence. This is why we did not call the end of the bear market in 2015. We needed more proof.
There were (and still are) plenty of analysts calling for $800-per-ounce gold. How do we know that recent gains are not just another bear trap?
The reason rests in the consistency of the gains. Gold rose 8.5% in 2016, a solid if not spectacular gain. Then gold rose again in 2017, by over 12%.
Gold fell on an annual basis in 2013, 2014 and 2015. Gold has not had back-to-back annual gains since 2011–12. These back-to-back gains in 2016–17 point to a solid foundation and a decisive break in the prior years’ bear market trend.
This “steady Eddie” performance the past two years has been overshadowed by much more spectacular gains in stocks and bitcoin.
Recent gains in stocks may continue for a while but are ultimately unsustainable because of the likelihood of a recession or liquidity crisis in the next few years. In those conditions, a retreat in stock prices of 30–50% would not be at all unusual.
Bitcoin is an unprecedented combination of fraud, mania and a Ponzi scheme all in one. The bitcoin price could go higher in the short run but will also end in tears, with 90% losses for naïve “investors” from around the world lured into an artificially pumped-up mania.
Meanwhile, gold is in the early stages of a sustainable long-term bull market that will come to surpass the 1999–2011 bull market in time.
Investor psychology has been slow to change despite recent gains. Gold investors have been discouraged by the periodic drawdowns in the gold price, including the November–December 2016 mini-crash after Trump’s election.
But these short-term drawdowns need to be considered in the context of the much more positive long-term trend just described.
The historic 1999–2011 rally also started slowly and then gained steam. The largest percentage gains year over year did not begin until 2005, almost six years after the bull market began. From there the bull market still had almost six years to run.
In addition to the retracement pattern and back-to-back annual gains that validate the start of a new bull market in gold, another technical pattern (with fundamental roots) has emerged as a positive for gold.
I’m sure you’ve heard the old adage that things happen in threes. This can apply to good things and bad. Right now we’re witnessing a positive phenomenon in threes when it comes to gold and Fed monetary policy.
On Dec. 16, 2015, the Fed raised interest rates for the first time in nine years. This was the famous “liftoff” and happened after the Fed teased markets about a rate hike through all of 2015.
Immediately after the rate hike, gold surged from $1,062 per ounce to $1,366 per ounce by July 8, 2016, a spectacular 29% rally and gold’s best six-month performance in decades.
Then on Dec. 14, 2016, the Fed again raised rates for the first time since the December 2015 rate hike despite earlier expectations that the Fed would hike rates four times in 2016. Gold surged again from $1,128 per ounce at the time of the rate hike to $1,346 per ounce on Sept. 8, 2017, a 19% rally in just over nine months.
Last month, for the third December in a row, the Fed hiked rates again after taking a “pause” on rate hikes in September. Once again, gold answered the starting gun. Gold immediately rallied from $1,240 per ounce on the afternoon of Dec. 13 to $1,258 per ounce the next day, a solid 1.5% gain in one day.
If gold follows the pattern of the last two December rate hikes, this new rally could go to $1,475 or higher by next summer. That would be a 20% rally in six months, roughly comparable to the rallies after the December 2015 and December 2016 rate hikes.