A technical
analysis of the
gold market cycle
by Ian McAvity
Deliberations on World Markets
Great
bear market bottoms are rarely recognized as they occur. During the terminal
plunge, and immediately after, one never knows for sure that there isn't
another shoe to drop, until the market demonstrates evidence of a change
in character. This is the nature of technical analysis: the study of market
behavior itself. I believe the evidence is growing that "The Bottom"
of the 1996/98 bear market in gold and gold stocks may be behind us.The
table below puts the 1996/98 bear market into historical perspective, with
details of the major gold stock cycles since 1946. It ties for 2nd place
with the 1973/76 bear when gold dropped 47% versus the recent 33% drop.This table certainly illustrates the substantially greater Relative volatility of Gold Shares versus Gold. As a rule of thumb, I often suggest the higher quality top tier gold stocks should be expected to demonstrate twice the percentage movement of the gold price. i.e., if gold rises 20% from a key low, I expect a 40% rise in a Barrick, or Newmont; and larger swings in the second tier stocks.
This
obviously ignores any assumptions about dramatic company events such as
discoveries or takeovers. Higher cost producers will obviously produce greater
price volatility than low cost producers; and more aggressively acting companies
will also offer greater volatility (the post-amalgamation of Kinross &
Amax Gold comes to mind).For those wearing rose-colored glasses, bear in mind that leverage works both ways. The major Gold Shares Index fell nearly double the percentage drop by gold (62% vs. 33%), but if you were holding the most aggressive companies, or exploration and developers, in many cases the bear took the square root, or even the cube root, of their peak prices! This latter arena is the blue-sky potential type where we've all seen the $1 to $20 shots soar... and inevitably if you play in this sector, you've also owned some as they returned to their former 'penny stock' status.
The
detailed look at the 1996/98 bear market (Table 1), viewed together with
Table 2 below, attempts to put the magnitude of the recent bear in perspective.
It was massive... Yes, I also note the downside caution flags that could
herald a further drop, if broken -- but that is a technical analysts' discipline
at work... The 1996/98 decline (Table 3) fits the magnitude, and showed
many behavioral characteristics that lead me to suggest that it's behind
us.
