Friday, May 20, 2011

Gold update

David Levenstein
17 May 2011
Sometimes cycles have the habit of repeating themselves, but in the case of gold, don't make this mistake.

Gold prices were general range bound between $1525 and $1480 during last week as the US dollar extended its recent gains. Commodities remained weak even though selling momentum eased a bit. Crude oil prices continued to slide and silver dipped to a new low. The CRB commodities index also extended recent declines and fell as low as 333.50.

Now that the price of gold has dropped by around $85 an ounce, many market participants are suggesting that gold was in a bubble just as it was in 1980 - and is headed much lower.

Firstly, I would like to mention, that while certain cycles have a habit of repeating, there is no guarantee that they will. If they did, making money in the markets would be the easiest thing in the world. All you would need to do is measure the time period between cycles and trade accordingly. And, if anyone has tried that, you will see that there is no truth in that assumption. The main reason being, in order for a cycle to repeat, all the underlying fundamentals impacting on the market should be the same as the previous cycle. In most instances it is almost impossible for the fundamentals to be exactly the same as they were previously, but when they are very similar the probability of a repeating cycle is relatively high. For, example a country defaulting on its debt will likely have the same impact on their currency as another country defaulting on their debt. Getting back to my point about the gold price now and in 1980, let me say categorically that as far as I am concerned there are no comparisons and therefore we should not expect the same conclusion.

For most of 1979 the price of gold was trading below $300 an ounce. The price of the yellow metal traded between $240 an ounce and $280 an ounce for the first five months of the year. Then, during the month of June it broke through the key resistance of $280 and by mid-July prices had hit $315 an ounce. Then, after pulling back to $280 an ounce the price had a parabolic move from $280 an ounce all the way up t0 $875 five months later. The price of gold had moved more than three times in less than 6 months. This is a parabolic move. Since 2000 when the current bull market began we have not seen one parabolic move. In fact the rises have been very gradual but consistent. This is one major difference. But, when we study the fundamentals between these two time periods we can see without absolute clarity that there is nothing similar.

The parabolic move in gold in 1980 was caused by a series of events. There was a hostage crisis involving American captives in Iran, an invasion of Afghanistan by the Soviets, oil prices were escalating almost weekly, and so were gold and silver prices, in one of the greatest currency panics ever to hit the U.S. dollar. Inflation was nearly 10% and increasing, and the worldwide perception was that the dollar was under siege.

Beginning in September 1979, the price of gold began to surge almost daily. The financial press reported frenetic trading in gold and other precious metals. . The Iran hostage crisis was a diplomatic crisis between Iran and the United States Fifty-two US citizens were held hostage for 444 days from November 4, 1979 to January 20, 1981, after a group of Islamic students and militants took over the Embassy of the United States in support of the Iranian Revolution.

Sixty-six Americans were taken captive when Iranian militants seized the U.S. Embassy in Tehran on November 4, 1979, including three who were at the Iranian Foreign Ministry. Six more Americans escaped and of the 66 who were taken hostage, 13 were released on November 19 and 20, 1979; one was released on July 11, 1980. The remaining 52 were released on January 20, 1981, at the very moment that Ronald Regan had completed his inaugural speech after having been sworn in as President of the United States to replace Jimmy Carter.

Then, on December 23, 1979, Soviet military units occupied Kabul, the capital of Afghanistan and by December 28th, the Soviet Union seized control of Afghanistan. The initial Soviet deployment of the 40th Army in Afghanistan began on December 24, 1979 under Soviet premier Leonid Brezhnev. The final troop withdrawal started on May 15, 1988, and ended on February 15, 1989 under the last Soviet leader Mikhail Gorbachev.

Inflation in the US had been on the rise in the late 1970s and had risen to an all-time high of around 15% by January 1980. Gold prices had been rising with inflation as measured by CPI though the rise in inflation wasn't the primary reason for the gold price spike in Jan 1980.

In an attempt to curb inflation, Paul Volcker, the Federal Reserve Bank Chairman at the time, increased interest rates from around 13% to 20%. The federal funds rate, which had averaged 11.2% in 1979, was raised by Volcker to a peak of 20% in June 1981. The prime rate rose to 21.5% in '81.

In those years, currency trading was not what it was today and the euro had not been conceived. The way people communicated in those years was completely different. There was no internet, and in fact the fax machine had not been invented. All communications were done telephonically and or by telex, something that today's generation have probably never heard of. And, not many people knew anything about China.

In the current bull market, things are completely different. The price of gold has been driven higher mainly due to the declining values of the major currencies in particular the US dollar. But, the other major currencies such as the euro, the Yen and sterling don't look all that healthy either. Budget deficits are spiralling out of control and government debit is simply exploding. As governments continue with their lose monetary policies they simply continue to debase their currencies. This is not the first time they have done this, but this time around, the size of debt is just unimaginable. And, gold is simply fulfilling one of its traditional roles as a hedge against the declining values of fiat currencies.

Today the currency market has become the largest market in the world. Anyone can participate and trading can be done instantaneously so long as one has access to the internet. China has become the second largest economy in the world from being number eleven in 1980. It has also become the largest the producer of gold in the world and soon it will be the largest consumer of gold in the world. Numerous central banks are adding gold to the reserves and at the same time diversifying away from gold.

If you think the gold price is a bubble and headed lower, then you obviously believe that the dollar well as the other major currencies are going to strengthen and that there are no monetary problems in the world. And, you believe that global government debt as well as burgeoning budget deficits are completely overstated. You also do not see the value of gold in such times and will probably invest in US Treasuries as a safe haven asset. I say good luck to you. I am sticking with the precious metals in particular gold and silver.


The price of gold is approaching the support level of the upward trend as well as the support of the medium-term 50 day MA. A flat Elliot Wave ABC correction would see support at around $1470. With all these technical indicators converging at the $1470/$1480 level, I expect to see a rebound in prices relatively soon.

David Levenstein is a leading expert on investing in precious metals .He brings over 29 years experience in futures, equities, forex and bullion. And, although he began trading silver through the LME in 1980, when it comes to gold, he has traded gold bullion, gold coins, gold shares, gold ETF, gold funds and gold futures for his personal account as well as for clients. Over the years, David has been published in dozens of publications and has appeared on CNBC and Summit TV (South Africa), and is a regular guest on JSE Direct, a premier radio business channel in Johannesburg, South Africa. He He is also a regular commentator on and David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.

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Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.

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