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June 18, 2010

Gold, Phase II

My apologies for the dearth of posts on the public blog of late. I have been bogged down with both personal and professional activities, including efforts to enhance the Member Area of the web site. However, despite the late hour, I wanted to slip in a post here because gold is on the verge of breaking to new highs, and I think it's important to observe the nature of gold's advance.

As readers know, I believe this commodity bull market will unfold in three phases. The first phase was dominated by energy. The second is, and will continue to be, dominated by precious metals. The final phase will be initially dominated by agriculture, but by the time this bull is coming to an end, every commodity sub-sector will benefit from a public-driven mania much like the tech bubble during 1999.

The first and second phases of the commodity bull were divided by the 2008 liquidation event, and precious metals, particularly gold, experienced a repetition of a very simple boom-consolidation pattern.

Gold weekly chart

The natural expectation coming into 2010 was to see the most spectacular boom... or parabolic move... of the bull market since we had just seen the largest consolidation. Yet the action hasn't quite unfolded that way. The obvious explanation, in my view, is that the nature of gold's advance changed along with the transition into the second phase of the bull market. Much like the crude oil advance in Phase I, gold's advance in Phase II should portray a trending asset as opposed to the manic depressive behavior of massive consolidations. We can see the character of such a trending move by observing gold's advance out of the 2008 low:

gold weekly chart

Rather than the large parabolic moves that were characteristic of the first phase of the gold bull, the current phase should be dominated by the stair-step advance of large rallies followed by basing/consolidation patterns. By this token, we are roughly half way through one of the large advances. The peaks of the advances and the troughs of the basing patterns can be anticipated using cycles. I won't get into too much detail since cycle analysis is the purview of the Member letter, but suffice it to say that the ends of the large advances correspond to intermediate cycle peaks while the trough of the basing pattern is formed by the corresponding intermediate cycle low. Therefore, cycles provide a strong tool for timing trades and adjusting position sizes.

Shorter-term, a reliable continuation pattern supports the notion of an impending strong advance.

daily gold prices

Additionally, precious metals mining shares have continued to act strongly, a further indication that gold still has some kick left in this rally. In my opinion, it certainly wouldn't pay to lose one's position at this juncture.

 

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