INDICATORS
Are We Overbought?
Is It Over For Gold?
Cycles and the futures volume open interest indicator will tell you.
It is tempting to compare the recent breathtaking runup in gold (from $1,423 in January 2011 to $1,920 in September) to the equally stunning one in 1980. After all, the trajectory of the current move was similar to the one in 1980, and the media and public are just as involved, the way they were in 1980. And investors know that when the media and the public pay attention to a move in a commodity, it is usually close to the end of that move. In fact, I have seen a chart of gold superimposing the 1980 move with the one in 2011, and yes, the two are similar. But are they comparable?
The drop in the price of gold to $1,532 per ounce over a 20-day period in September 2011, a price drop of $388, further contributed to the perception of a peak in the price at $1,920 on September 6. Since then, gold has managed to crawl its way back up to $1,799 on November 8, only to be pushed back down to $1,667 on November 21 by the failure of Congress’ debt-reduction committee to reach an agreement, setting the stage for $1.2 trillion in automatic spending cuts.
Is it over for gold?
When we are looking at gold charts from 1784 to the present, a 20-year cycle becomes evident in the price movements. The gold price cycle is the natural fluctuation in the price of gold between periods of the public’s and the government’s demand for gold as an investment, an inflation hedge, and a holder of its reserves, and the public’s preference for other investment avenues and the government’s preference for a strong currency instead of gold for its reserves.
FIGURE 1: GOLD CYCLES SINCE 1784. Cycles 1 and 5 are longer — 31 years or more and 53 years, respectively, even though prices hardly moved. When prices did move, cycles lasted between 16 and 26 years. The present cycle is barely 12 years old, which is short compared to historical cycles.