Take a long-term look at most types of investment, especially most types of investment "class", and highly significant support and resistance levels will become apparent. Two excellent examples of this phenomenon are the 1000 level on the Dow Jones Industrial Average and the $US 300 level on Gold.
Until mid-1954, the all time high for the Dow was 381.17, set on Tuesday, September 3, 1929. That's right, the 1929 high was not breached for 24 years. By 1966, however, the Dow had left that 1929 high far behind it. In February 1966, the index reached a high of 995. That was the Dow's first trip to the 1000 level.
The Dow made many more trips to that 1000 level. It reached it in late 1968, and it actually broke through it (barely) in early 1973, mid 1976, and mid 1981. But the Dow did not decisively breach that 1000 level until the beginning of 1983. For seventeen years (1966-1982) the 1000 level on the dow remained a formidable resistance point.
Up until 1934, the "official" Gold price was set at $US 20.67. From 1934 until 1971, the "official" price was $US 35.00. Gold did not reach $US 300 an ounce until July 1979. But once Gold breached that $US 300 level, it never went back below it for long. Between July 1979 and November 1997, Gold only traded below $US 300 twice - for one day in June 1982 and for three weeks in Feb/March 1985.
Just as the 1000 level had stopped the Dow for 17 years (1966-'82, the $US 300 level supported Gold for 18 years (1979-'97). For nearly two decades, $US 300 was the FLOOR for Gold.
On November 26, 1997, Gold (spot future) closed at $US 296.00. That was the first Gold close below $US 300 since March 15, 1985. It was only Gold's third trip below $US 300 since it had first breached that level (on its way up) in July 1979. For all but a few weeks of the last three years - see the chart - Gold has traded below $US 300, a phenomenon unprecedented in almost two decades.
The beginning of Gold's sojourn "below the floor" coincided with the transformation of the Asian Crisis from a "glitch in the road" to a "Global Crisis". Those were President Clinton's descriptions of events, the first in July 1997, the second in early December 1997.
1998 was the year that the Asian Crisis did indeed become global, culminating with the Russian debt default in August and the Fed lowering U.S. interest rates three times in seven weeks in Sept. - Nov. 1998 to save the world.
1999 began with yet another currency meltdown, this time in Latin America in general and Brazil in particular. It continued with a war in Kosovo, and a landmark on U.S. stock markets as the Dow broke above the 10000 level for the first time.
This was the point at which the War against Gold reached a crescendo. For nearly a year, the IMF had been announcing plans to sell Gold. In early May, with the Kosovo air war over a month old, all the G-7 nations, one after the other, came out with statements approving these plans. But despite this, Gold was moving up towards the $US 290 level and even worse, Gold stocks in North America, South Africa, and Australia, spurted upwards. By May 6, the XAU (Gold index) showed a rise of 46.4% since the beginning of the Balkans war. That was more than three times the rise on the Dow over the same period.
Then, on Friday, May 7, 1999, the Bank of England (BoE) announced a plan to auction Gold. This is what The Privateer had to say about this development at the time. We quote from our Early May 1999 issue - published on May 9, 1999.
The significance of this move was clear. To get the Gold price down to its level of the late 1970s, the Central Banks returned to the methods of the late 1970s - namely Gold auctions. All the Gold suppression moves since that time had been done "covertly", by means of Gold leasing, forward sales, Central Bank lending etc. Now, that was deemed insufficient by itself, and the BoE announced right out in the open that it was going to auction Gold. The result was predictable enough. By the time the first auction was actually held in July 1999, Gold had retreated to 20 year lows of just above $US 250.
Gold finally broke loose on September 26, 1999 when the European Central Banks announced a five-year "freeze" on their Gold leasing and lending activities. On September 20, 1999 spot future Gold closed at $US 255. Just over a week later, on September 28, it closed at $US 308. Gold then went on to post a high (on a spot future closing basis) of $US 324 by October 5. The downward momentum had been broken.
But, as you undoubtedly know, the $US 300 level had not turned from a "ceiling" back into the "floor" it had been between 1979 and 1997. Gold fell back below $US 300 by the end of October, and stayed there until February 4, 2000. On that day, an announcement from Placer Dome about curtailing their Gold hedging strategies coincided with a $US 23.20 surge from $US 287 to $US 310. These announcements were claimed to be the cause of Gold's second surge above the $US 300 level in just over four months.
The real reason could be seen right on the market for U.S. Treasury debt paper. The yield curve had "inverted" with short-term yields moving above longer-term yields. This phenomenon is always a sign of strained liquidity within the system, and that is just what had occurred as the Fed backed off its credit-creation in the wake of Y2K.
For the second time this year, Gold is back above $US 300. Once again the floor is being tested, but it has not been broken yet.