The 1970s
Road Map
Here is an extract from commentary
that was posted at www.speculative-investor.com on 13th June 2002.
There is no point in looking at what
happened over the past 20 years as a guide to what is going to happen over
the remainder of this decade. The secular bull market in financial assets
that dominated the markets during the 1980s and 1990s has ended and new
secular trends are emerging. Based on evidence gathered over the past two
years these new trends will encompass a strengthening gold price and a
weakening US$. As a result of the massive inflation that has occurred over
the past few years and the requirement of the world's monetary authorities
to keep the supply of fiat currency expanding at all costs, two other trends
that will almost certainly become apparent as the current decade progresses
are the trends towards higher interest rates and higher commodity prices.
So, we think it is fair to say that the first decade of this century will
have a lot more in common with the 1970s than with either the 1980s or
1990s. As such, in an attempt to develop some sort of road map regarding
what we should expect to happen over the next few years it makes some sense
to look at what happened during the 1970s. With this concept in mind we
have, over the past several weeks, done a couple of comparisons between
the rally in gold stocks that began at the major bottom in November of
2000 and the gold stock rally that began at the major bottom in January
of 1972.
The below chart shows how the current
rally in the HUI (AMEX Gold BUGS Index) is proceeding relative to the great
gold stock rally of 1972-1974.
At this stage of the 72-74 rally there
was a 3 month correction followed by an almost vertical rise. If a similar
situation developed now we would see gold stocks drift lower into late-August
and then rocket higher during the September-November period. Since gold
stocks have been traveling in the opposite direction to both the US$ and
the overall stock market a 3-month correction in gold stocks would be unlikely
to occur unless there was a 3-month recovery in the Dollar and the stock
market.
Multi-month counter-trend moves in
the gold, stock and currency markets at this time would mesh almost perfectly
with our original forecasts for this year (we forecast that the biggest
downward moves in the Dollar and stocks and the biggest upward move in
the gold price would occur during the final few months of the year). However,
although a prolonged correction in the gold market would not be unusual
given the preceding strength and the huge speculative long positions that
will need to be unwound at some point, we can't envisage the stock market
or the US$ beginning multi-month recoveries from current levels. As such,
the odds favour the current correction in the gold market being considerably
shorter than 3 months.
It is probably going to be over much
sooner but we suggest keeping late-August in mind as a worst case end-date
for the current correction in the gold market. This is a correction in
an on-going bull market, but bull markets never make it easy for investors
to hang on for the ride. Peter Lynch, one of the most successful mutual
fund managers of all time, said that during the period when he managed
Fidelity's Magellan Fund more people lost money investing in this fund
than made money despite the fund's exceptional performance. This is because
a lot of people would always jump into the fund after a period of high
returns and exit after experiencing a significant draw-down.
Regular financial market forecasts
and
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http://www.speculative-investor.com/new/index.html
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