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Gold Price Cycle

When Will Gold Peak?

Written by Briton Ryle
Posted February 6, 2013

Looking at a gold graph from 2005 until today, what do you see? A very intriguing cycle repeats itself over and over again.

What we will do here is isolate that technical cycle prevalent since 2005, find our place within it today, extrapolate from that a projection of gold’s next move, and then use some fundamentals to support that projection.

Of gold’s many patterns and cycles ranging from weekly, to monthly, to seasonally, none is as prominent as the 21-22 month cycle that the yellow metal has steadfastly held to four times since 2005, each one arriving almost precisely on cue.

The cycle runs from spike to spike, culminating in four peaks on the following dates as per the London PM fix:

May 12th, 2006 (at $725 an ounce)

March 17th, 2008 (at $1,011.25 an ounce)

December 2nd, 2009 (at $1,212.50 an ounce)

September 6th, 2011 (at $1,895 an ounce)

Do you notice a pattern in the spacing from peak to peak? They are 22, 21, and 21 months apart; right on cue, as indicated on the following graph of the SPDR Gold Trust ETF (NYSE: GLD):

GLD PeaksSource:

Of course, there were many secondary price peaks all the way up. But these four are the most prominent, since they were immediately followed by the deepest and longest corrections.

Now, do we have the nerve to extrapolate from this pattern when the next gold spike is due? We could simply count forward 21 months from the last peak of September 2011, taking us to June, 2013. To be safe, let’s use a range of 20-22 months, or May to July.

And since the graph above clearly shows how each 21-month peak climbed higher than the last, we could reasonably expect this next peak to climb above the $1,895 PM fixed high of 2011, or well above $1,925 in terms of the futures price.

However, important to note is the time when these new peaks began mounting their final leg to each top. As the following graph shows, each of the four peaks (in red) had a running start ranging from two to five months prior (in green).

GLD Peaks and ValleysSource:

Well, we mustered up the nerve to count 21 months forward to arrive at June, 2013 for the next peak. Why not go all the way and count back two to five months from there?

If this cycle repeats itself for a fifth consecutive time, the next spike up in gold should begin no later than this coming April, and possibly as soon as any day now.

Any day now? Just zoom-in a little more tightly and we clearly see gold is at the fine tip of a pennant triangle. Now, these pennant tips can break out either way: up or down. But usually they break toward the triangle’s longer leg—in this case, up. And that was precisely the case the last time around, drawn in blue.

GLD Pennant TriangleSource:

But notice the cluster of sideways bands (in orange)? Upward break-outs from the tip of a pennant often jump up in steps, like little rest stations along the way up to the summit of Mount Everest. Gold is not Superman, able to leap tall buildings in a single bound.

Word of caution: We must repeat—the tip of a pennant flag can break either way. We could see a retest of the recent 2-month-long support of $1,640 gold, or $160 GLD, before mounting higher.

Alright, then. So this is what the technical charts and the four-time recurring 21-22 month cycle tell us. The question now is… do the fundamentals support it? What does the supply and demand picture look like?

Let us start with demand. In the face of depreciating currencies all over the world, gold buying as a hedge against currency risk continues to be relentless, especially in emerging market economies.

We aren’t talking about temporary or seasonal jewellery and wedding purchases. We’re talking about some heavy duty buying for safety concerns, for preservation of purchasing power, by buyers with deep pockets—like banks and governments.

“The World Gold Council, based in London,” reported Bloomberg, “examined eight periods of ‘crisis conditions,’ and found … gold topped currency hedges by 1 percent.”

In his statement cited by Bloomberg, the global head of investment research at The World Gold Council, Juan Carlos Artigas, emphasised the reason for gold’s appeal as a currency hedge.

“Gold has a positive correlation to emerging market growth, and a negative correlation to the dollar and other developed-market currencies,” he explained. “Given these qualities, there is a strong argument for complementing existing exchange-rate hedging strategies with gold.”

In a Forbes article, Kitco News explains the consequences of not hedging currency risk, saying it leaves the unhedged “vulnerable to swings in foreign exchange rates… Emerging market currencies are known to be particularly prone to big movements and can damage underlying positions.”

The article further reports that a study by the World Gold Council “showed that using a blend of a 50% gold overlay and 50% currency hedge can reduce portfolio drawdowns – or peak to valley declines – for investors with emerging market allocations relative to a foreign-exchange hedge.”

It added, “Since emerging market demand for gold is one of the reasons why gold prices have risen in the past 10 years, gold also offers some correlation to emerging market growth.”

Ah, yes, now we see why gold is so popular with governments, banks, and everyday people in emerging market countries… they need gold to help catch the value dropping off their rapidly depreciating currencies.

Given there is no change in sight for currency devaluation, likewise there is no end in sight for gold purchases. There is gold demand as far as the crystal balls can see.

But with all this increasing demand, might there be an end in sight for gold production? Or more realistically, a significant production falloff?

As the Financial Post recently reported, such may very well be the case in just a few years’ time:

“National Bank Financial … are convinced a ‘production cliff’ is looming around 2017 in which senior gold miners will begin to undergo a sharp production decline. That will create investment opportunities.”

“Analysts Steve Parsons, Paolo Lostritto and Shane Nagle think the reasoning behind the ‘production cliff’ is simple: too few large deposits have been discovered to sustain current production rates. The fact that miners are delaying or cancelling projects because of cost pressures and other constraints has accelerated the move towards the ‘cliff,’ they noted.”

So if demand is continually increasing, whether for currency hedging in some countries or capital appreciation in others, and production is already running headlong toward a cliff-like shortfall by 2017, there is still time to capture these 21-month repeating gold-spike cycles.

In fact, if the cycle—now into its fifth time around—continues, there may yet be three more such spikes to come before 2017. And if each spike runs past the previous spike’s value, three more spikes can take gold to the amazing price of…

Naw... I can’t do it, just invent a number like that. I’ll let you do the math.

Joseph Cafariello

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