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 INDEX  >  Exposing the reality of a gold complex, without the emotion

  Published by Toronto Star: Monday, September 12 2009      By: Bill Carrigan

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I am sometimes asked to explain why private investors and portfolio managers should include some form of technical analysis in their methodology.

The truth is that the technical analyst has a built-in set of rules that govern his or her investment process. Rules remove the emotions that get in the way of common sense.

We believe expensive stocks will get more expensive, and cheap stocks will get cheaper. We only buy and hold rising stocks and we use a stop-loss strategy to protect in the event we are wrong.

We believe a stock's first 52-week high will not be the last, and that a stock's first 52-week low will not be the last. We believe your first margin call will not be your last margin call. Some of the best technicians will tell you to never meet a margin call because if you're that wrong, the problem position should be completely liquidated.

Rules instil discipline and confidence. The technical analyst will never argue with the markets. The great advance that began in March carries a message about the reality of the global recovery – we may not agree, but we know the reasons will surface later.

Many technicians have taken note of the recent new 52-week highs in many of the gold stocks and the gold-related exchange traded funds.

If we respect the first 52-week high rule we know to expect more gold stocks to follow their peers into the 52-week high club.

The other problem is the emotional issue of gold breaking above a milestone, in this case the $1,000 (U.S.) barrier. Keep in mind that a break above the milestone could trigger a bullish stampede into the precious metals complex. That is why we need to know whether we are at the beginning of a great advance for the gold complex, or perhaps at the beginning of the end.

Only a technician studying long-term bullion charts can expose the reality of the gold complex and in turn keep our emotions in check.

Our chart this week is that of the monthly closes of bullion in U.S. dollars spanning about 10 years.

Note the great advance that had its origin in early 2001 at about the $250 level to the current $1000 level.

Our long-term monthly chart also illustrates the structure of the great advance, namely that of a secular up-trend.

A secular up-trend is a long-term advance that can persist for 12 to 16 years and will be interrupted by a series of shorter bull and bear cycles that can span about three years from peak to peak.

The secular up-trend will usually contain five of the shorter bull and bear cycles.

I have identified the three completed cycles on our chart as noted by the cycle (1) peak at March of 2004. The second cycle (2) peaked at April 2006 and the third cycle (3) peaked at February 2008.

I have also identified the corrective periods at (A), (B) and the recent 2008-09 period at (C).

So now we can put it all together.

We can expect about five bull and bear cycles in the current secular up-trend and it appears we are completing a third corrective period at (C), which we assume will introduce our fourth cycle.

The fourth cycle then should carry the precious metals complex through the $1,000 milestone and the atmosphere should be one of euphoria accompanied by a bullish stampede.

Now for a word of caution, because each bull and bear cycle of the series will have less and less price magnitude. In other words, the best and easiest money is made during the first two cycles. By the time we get to cycles four and five the lower fruit has been picked

That means we can enjoy the advance but we must not get caught up in the party atmosphere and stay too long.

Another wake-up call; keep in mind the last cycle (5) of the series does not necessarily make a new high, so remember that with gold we are here for a good time – not a long time.

Bill Carrigan, CIM is an independent stock-market analyst. He can be reached at [email protected]  
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