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THE DOW REPORT
Beating the Odds

In the June 10, 2005 Wrap Up I explained that gold was “Poised to Rally” into at least an intermediate term advance. I said that this rally would be a “very very important test for gold” and that the rally would tell us without a doubt if gold was still in a secular bull market or if it had turned the corner and now operated in a secular bear market. As this rally materialized, gold bettered the December 2004 high and in doing so, it set a new record for 9-year cycle advances. In this wrap up I want to review the statistics surrounding all previous 9-year cycle advances and look at the possible meaning of such advance.

When we talk about cycles, all we are really talking about is a way of looking at the various trends of various degrees within a given market. There are long, intermediate and short-term cycles that are used to quantify the price movements of each of these corresponding trends. It is these quantifications that provide us with expectations of the current cycle or trend.

The most recent secular and cyclical bull market for gold began at the 2001 9-year cycle low. I call this cycle a 9-year cycle because there have historically always been 9 intermediate term cycles that average approximately one year in duration, nestled within this longer term 9-year cycle. This consistency even proved to be the case with the 9-year cycle that bottomed in 1976 and that peaked at the all time high in 1980. This can be seen on the chart below.

In the next chart below, I have the most recent three 9-year cycle advances. Beginning with the advance in 1985, that cycle moved up into late 1987 peaking at just over $500. From that peak, gold moved lower as that 9-year cycle turned down and finally found its bottom in early 1993. Again, from that 9-year cycle low, a new 9-year cycle was born and it moved up into early 1996 and then turned down into the most recent 9-year cycle low, which bottomed in 2001.

Now I want to review another historical fact surrounding the 9-year cycle in gold. Notice that the 9-year cycle advance into the 1980 top consisted of 4 of the smaller annual sub-cycles. Each of these sub-cycles is marked with an “s.” Next we have the 9-year cycle advance that moved up into the 1987 9-year cycle top and in this case, the advance consisted of only 3 consecutively higher annual sub-cycles. From that peak the 9-year cycle declined into the next low, which occurred in 1993. From that low another 9-year cycle advance was born and this time it ran for the duration of 4 annual sub-cycles up. The point here is that there has never been a 9-year cycle advance that has consisted of more than 4 consecutive annual sub-cycles up into the 9-year cycle top. So, based on this historical precedent, gold was not expected to have advanced beyond 4 annual sub-cycles up into the current 9-year cycle top.

However, the advance into December 2004 broke this precedent when gold advanced into a 5^th consecutive sub-cycle. From that top gold did indeed become pretty sluggish and we once again began to see signs that the current 9-year cycle had topped. Then in June, as I reported to you in the June 10^th Wrap Up, gold was once again poised to move higher. Given the fact that gold had already pushed beyond any historical precedent with 5 consecutive annual sub-cycles up, I did expect to see this sub-cycle challenge the December 2004 high, but I honestly did not expect to see this advance move above the December 2004 high. Odds were simply against any such move, but gold did in fact beat those odds.

So, yes there always is a first time for most everything, and this was it for gold. Perhaps this occurred as a result of the Feds re-inflation efforts. Or perhaps gold sees hyper-inflation and the demise of the dollar sooner rather than later. Or perhaps the current 9-year cycle advance is moving up in its last annual sub-cycle advance before the 9-year cycle finally turns down. In reality, it doesn’t matter why or what this latest advance means from a technical perspective. It is what it is and the historical precedent has been broken. Gold has now set new rules as it relates to the 9-year cycle.

One common link is that all 9-year cycle tops have been marked by a down turn of my long term Cycle Turn and Trend Indicators. These are the same indicators that told me back in early June that gold was poised to rally. But, based on the historical precedent set by the cyclical relationships of the past, I did not expect this advance to better the December highs as a result of these indicators having turned positive. Odds were very strongly against it. Given that the historical cyclical relationships of the past are now breaking new ground, these indicators are the best guide and as long as they remain bullish, then so does the advance into new ground-breaking territory. So, until these indicators begin to weaken on an intermediate and especially on a long term basis, gold remains, at least for the time being, bullishly in uncharted waters. I now update these indicators at least three times a week on the subscriber-only page for Cycles News & Views subscribers.

As everyone knows, gold made a major bottom in 2001. This is where the most recent secular bull gold market was born. From a cyclical perspective, this was a 9-year cycle low. When this intermediate term cycle is moving up in conjunction with the advancing 9-year cycle it produces very powerful rallies. Then when this intermediate term cycle turns down against the 9-year cycle, it creates a counter trend downward move. This downside movement serves to correct the previous advance and then the market moves on. Of course, the opposite is true when the 9-year cycle is moving down. I have marked the 9-year and intermediate term cycle lows on the monthly gold chart below. These intermediate term lows are marked with an “S” and the 9-year lows are marked with a “9.”

Up until 2004 the 9-year cycle advance had never had more than 4 intermediate term cycle advances into the longer-term 9-year cycle top. The advance out of the April 2003 low was the 4^th intermediate term cycle advance within the longer-term 9-year cycle. Therefore, gold was expected to top with that intermediate term advance in late 2003. But, this advance into the intermediate term cycle continued pushing higher into early 2004 and then dropped hard into the April 2004 low. This concluded the 4^th intermediate term advance within the larger 9-year cycle. Since there had never been a 9-year cycle that had advanced into a 5^th intermediate term cycle, odds suggested that gold had then topped.

But, there is always a first time for everything and last year was the first time in history for gold to advance for 5 consecutive intermediate term cycles. I believe that this was as a direct result of Greenie’s liquidity pump. So, yes, obviously gold was influenced by this re-inflation effort, but the ebb and flow of the intermediate term cycle still occurred. In the process, gold was pushed up into a never before seen 5 consecutively higher intermediate term advance within the context of the larger advancing 9-year cycle. Thus far, this unprecedented 5^th intermediate term advance topped out in December 2004 at 458.70. From that top gold has been moving down as this intermediate term cycle has been moving down.

Now this brings us up to the present. I believe there is a very good possibility that gold is now advancing upward in a new intermediate term cycle. If not, it’s close and that advance should begin after one more push down into that low. Either way, this will be the 6^th such advance since the 2001 9-year cycle low. Could it be that 2005 will mark the first time to ever see 6 consecutively higher intermediate term advances? Or will 2005 serve to confirm that the 9-year cycle top has been made? I can’t stress enough how important the advance out of this intermediate term low is for the future of gold as it relates to the remainder of the current 9-year cycle. This advance is the first advance of this degree since the December top. Therefore, gold is about to be given a green light to move higher. In order for the 9-year cycle to remain bullish, gold MUST exceed the December 2004 high at 458.70. Should this intermediate term cycle top out prior to exceeding the December 2004 high, then we will have solid cyclical evidence that the December high marked the 9-year cycle top and that gold is now on the down hill side of that cycle. Should this occur, lower prices will then be confirmed.

Nestled within the intermediate term trend or cycle are a couple of even shorter-term trends or cycles of importance. These shorter-term cycles along with the Cycle Turn and Trend Indicators will be key to monitor as this advance gets underway. These shorter term cycles and indicators will provide us with the confirmation or non-confirmation needed as the advance unfolds.

Tim W. Wood

If you would like more detailed and up-to-date information on these developments as they unfold, then Cycles News & Views is your source. I report on gold in the monthly newsletter as well as on my web-based comments during the week.

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