Last week, the spot future intraday low for Gold was $US 280.50. This week, it has been $US 279.00. Clearly, the pullback from Gold's foray above the $US 290 level in the wake of 9/11 is slowing down. Just as clearly, there is yet no sign of a significant turnaround in the falls of the past two weeks. On the surface, we are now in a situation just like the one after the "Washington Agreement" spike of 1999, the February 2000 spike, and the spike of May 2001. $US Gold goes up, hovers for a while, and then starts going down again.
On the U.S. Gold futures market, that is exactly what is happening. Technically, however, the situation has radically changed from what it was before the Washington Agreement spike of late 1999 or even before the spike of May this year.
On the futures markets, spot future Gold has, in effect, double bottomed. The first bottom came in late August 1999 at $US 252.50. The second came in April 2001 at $US 255. These are not identical, but they are close enough, especially on a weekly bar chart.
Between the pullback from the Washington Agreement spike in 1999 and the almost identical low set in April this year, Gold traced a pattern of lower highs and lower lows. Since the May 2001 spike, Gold has traced a pattern of higher highs and (so far) higher lows. We can call the start of this huge bottom formation in Gold the August 1999 lows and the "end" of the bottom formation the April 2001 lows. What we can NOT yet do is to say that the bottom formation is over, because spot future Gold has yet to sustain a trading range ABOVE $US 300.
It has been a long process, very similar to the long drawn out top on the Dow which lasted from March 1999 to September 2001. That "top" lasted 30 months. So far, the "bottom formation" on Gold has lasted 26 months.
The problem is that most people don't want to admit that the Dow's two year plus 10000-11000 trading range IS a "top". If they did that, they would have to take the further step and admit that the future prospects for the index are all DOWN. Conversely, if Gold has been in a "bottom formation" for just over two years - and it has - then the prospects for the metal are all UP.
And so they are. The burning question is, of course: When does the "UP" start?'.
There is no way to answer that. The only way we will know for sure is when Gold gets back above and stays above $US 300. If purely market forces were driving Gold, that would have happened long ago. Indeed, if purely market forces were driving Gold, it never would have dipped below $US 300. Given the deterioration of the purchasing power of ALL fiat currencies over the past three decades, and given the demand/supply imbalance that has been a feature of physical Gold production for over a decade, a Gold price now at the same level as it was in 1979 is patently absurd.
Nonetheless - that is what has happened, and is still happening.
Patience? Well, it is a virtue for those who hold physical Gold. It is not such a virtue for those who hold paper investments, especially stocks. After all, one would hardly call someone who holds right through a 30 month top formation on the Dow and is still holding now, with the Dow having confirmed a bear market, a "patient" person. Such a person has, unfortunately, failed to take advantage of any of the many opportunities over the last two years plus to get out with capital intact.
On the Gold side, the situation is reversed. Anyone who has NOT bought Gold, if for no other reason than insurance against what has happened on the paper markets, cannot be said to be "patient" either. What such a person is doing is taking the risk of having to buy in a climbing market. After all, Gold has not been in a "top" formation, it has been in a BOTTOM formation.
And what of those who HAVE bought Gold, even those who bought it two years ago. Well, unless the person was so unfortunate as to have bought at the top of one of Gold's spikes, that person is very likely slightly ahead on his or her original purchase. On top of that, they have the fact that Gold IS in a bottom formation to back up their judgement.
The trick at the moment is not so much to make money, the trick is not to LOSE money. Most Americans who have bought Gold any time in the past two years plus have not lost a penny. And foreign investors who have bought Gold are almost all sitting on significant profits. Then there are the "dreaded" Gold stocks, all of which have outperformed almost any other stock category this year.
The day's of "20% annual profits in perpetuity" so beloved of the stock investors of the late 1990s are long gone. What happened on 9/11 did not change that fact in the slightest. All it did, financially, was to cause a gigantic amount of physical damage, an even bigger amount of business disruption, and a truly staggering amount of new money creation by Central Banks.
The combination is economically lethal, even more so because it is not being recognized. There is only one "class" of investment that cannot be negatively influenced by monetary excesses. That is an investment which does not derive its "value" from these excesses. Credit-creation "helped" all paper-based assets for years. As witness the reaction to the Fed's rate lowerings of 2001, it is not helping them now.
Gold, and patience, are all that is required. Gold is easy to get, patience is perhaps not so easily acquired. But it is inded a virtue, and seldom as needed as it is at present.