Ever since the top of the gold bull in September of 2011, gold bugs have been waiting (im)patiently for their yellow metal to continue its massive climb from the 1999/2001 lows. I don’t care if you think gold is a scam, a barbarous relic, an insurance policy, or a form of money, as Refined Investors all we care about is price, and price has been going up for over a decade now.
Gold brings out a lot of emotions in people, but it still obeys the basic rules of supply and demand. When something climbs very rapidly in price, it inevitably brings more supply onto the market. If somebody was willing to pay you $1,000,000 more for your house than you paid for it, you would probably sell it in an instant unless you had significant emotional ties to the property. When gold leaped above $1900/oz, there were a lot of people willing to part with grandma’s old necklace at the local “We Buy Gold” store. Rapid rises in price also bring a lot of weak hands into a trade, just ask any of the professional house flippers that came out of the woodwork in 2005 and 2006.
This oversupply brings a lot of slack into a market, and the only way to eventually get rid of it all is for genuine buyers to absorb it. This does not happen overnight, and it takes time for the supply to move from weak hands to strong hands. If you look at the chart below, you will notice that every time gold corrects from an intermediate peak it is taking longer and longer for the bears to take price back down to the low $1500′s where gold has found support (large file):
While the gold bugs will scream manipulation and the bears will growl that gold is about to plummet to $1200/oz, what I see is a market that is slowly and efficiently absorbing supply with every correction. The angle of each decline has been getting flatter and the time required to get to the bottom of each intermediate cycle is taking longer. That is the sign of a market that is strengthening and not weakening. While gold bugs would love for price to instantaneously skyrocket to $10,000/oz (or pick a number out of a hat), the markets are saying that it is going to take a little longer, but higher prices will eventually come.
If the next move continues the pattern of shallower correction angles, we are likely to see gold consolidate into the next intermediate low or possibly even begin a mild uptrend at some point. While this is not an exciting 2013 forecast for those looking for the bull market in gold to continue, students of fractals understand that after a large trending move a consolidation is required to build up enough energy for the next trend to resume. The longer that an asset consolidates, the larger the next trending move will eventually be when the fractal energy is finally unleashed.
If you want to see a great example of what higher prices do to a market, watch how a water ski jumper zooms out in front of his boat to create slack in his rope (representing higher prices). Eventually, the boat catches up (demand) and the ski jumper’s rope becomes taut, propelling him to the other side and launching him over the jump (resumption of the trend):
In conclusion: Gold Bugs – be patient. Traders – enjoy the trading range. Bears – you get your chance every four years and you’ve done well. Investors – you’re still up over 600% since 2001.
The gold bull, something for everyone.
Good trading all.
Steve Chapman, TRI