The gold price has experienced a rather precipitous decline of 6,7% since its recent peak of $691,7 on 20 April 2007. This correction is considerably larger that the drop in the prices of commodities in general as well as the increase in the value of the dollar from about the same time. This begs the question whether we are experiencing a normal bull market correction or perhaps the start of a more ominous longer term-trend reversal.

In order to gauge bullion’s action, it is useful to look at how the historical picture stacks up. The following chart (originally devised by and adapted by Plexus Asset Management) shows the three stages of a typical gold cycle as experienced from 1971 to 1980, while overlaying the present cycle on the same axes.  


Analyzing the 1971 to 1980 gold bull market, price data show that the first phase from 1971 to 1973 was largely on the back of a weakening dollar, whereas the period from 1974 to 1978 saw increased investment demand, with gold rising in all currencies.

It would appear that we are seeing similar action in the gold market in the current cycle. Although we are all quite familiar with the movements of the dollar gold price, the trend of gold expressed in other currencies receives far less publicity. The following graph and table clearly illustrate that, irrespective of its recent decline, bullion has been making solid headway since the middle of 2005 in most major (and minor) currencies.



These are good numbers, but what is their significance? Simply that the bull market in gold that commenced in 2001 goes beyond being only a reflection of dollar weakness. The fact that bullion is rising in all currencies probably points to two aspects, namely: (1) an increasing despondency with paper money, and (2) rising global investment demand for the yellow metal, including more than a modicum of interest from central banks starting to spread their US dollar foreign reserves around.

The final phase of the previous bull market (1979 and 1980) of course witnessed widespread speculative mania propelling gold all the way to a short-lived peak of $850, followed by a 21-year bear market (to eventually bottom at $250 in 2001).

Although the stage where “every man and his dog” start chasing bullion is probably still a while away, it will not surprise me to see the current bull market assuming “bubble” proportions at some stage and eventually “blowing off” – like bull market tops often do before reversing direction.

In my assessment bullion is experiencing a normal bull market reprise and is set to resume its upward path in due course, albeit in fits and starts. The exact nature of the tailwind pushing gold northwards (be it economic or socio-political) will probably only become apparent after the fact – as has so often been the case in the past.

I am watching the gold stocks carefully and will post a few comments about that as events unfold over the next few days.