An Echo of History

On this holiday weekend, let’s take a short trek along the yellow brick road. While multi-month price corrections are never fun for the asset holder, overall, intermediate corrections are a natural, healthy, and constructive part of longer-term bull market dynamics. With this in mind, there are some good reasons to think the gold price correction off the all-time highs last August may be a constructive, albeit uncomfortable, part of a larger, ongoing bull market in gold. Taking stock of recent market developments, two points are particularly worth noting. The first is that when comparing this 2020-2021 gold price correction to other significant past corrections, we are not in uncharted territory for gold bull markets. The second point is that there are some indications that this correction may be nearing an end.

There’s never a shortage of complexity and fundamental moving pieces in the market, so while no two corrections are exactly alike, the 2008 correction in gold provides some striking similarities to the present price action. Early in 2008, the gold bull market was fully in gear. Price broke out to a new nominal all-time high, and shortly thereafter proceeded to breach the $1,000/oz. level for the first time ever. These notable developments, however, were immediately followed by a significant intermediate degree correction lasting the majority of the remaining year. By the end of a roughly seven-month correction, price bottomed in the fall under $700/oz. This intense intermediate correction paved the way for the next leg higher in gold over the several years that followed. Eventually the rally out of the 2008 trough topped out at over $1,900/oz. in late 2011.

Turning back to the present, the current price decline, as in 2008, was also immediately preceded by a new nominal all-time high exceeding the high mark set in 2011. Price then proceeded to break above the $2,000/oz. level in August of 2020 for the first time ever. As we now turn the calendar to April 2021, the decline that has followed these all-time highs has also lasted seven months, and the decline has extended below $1,700/oz. at lows to date.

There are a few more notable similarities between these two corrections that bear mentioning. Comparing the 2008 trough with where we are in the gold price today, the 2008 peak-to-trough decline retraced between the 38.2% and 50% Fibonacci retracement levels, measured off the entire 2001 to 2008 bull market rally preceding the decline. The present decline has also accomplished the same technical feat, as measured off the late 2015 lows in gold. Both declines also broke below the 50-week moving average, while also resetting the daily and weekly MACD and RSI technical indicators from extremely overbought levels all the way back down to levels consistent with other past major rallying points. An additional perspective, also supportive of the notion that we may be near a bottom, comes from the Commitment of Traders (COT) report. By the end of the 2008 decline, just as in the present moment, the COT report was about as bullish as it gets. The report suggests that commercial hedgers, typically the “smartest” money in the gold space, are at extremes in their positioning for anticipated higher gold prices. To paraphrase Mark Twain, history doesn’t repeat, but it often rhymes.

Noting some obvious differences in these two periods: This last week, gold prices accomplished a double bottom off of trend-line support tracing back to 2018 that captures the steepest sustained period of price advance in the rally that started at the end of 2015. In 2008, the analogous trend line broke, and price also managed to drop below the 100-week moving average. The current decline has not breached the 100-week moving average. The gold price closed the week at $1,728; the 100-week currently sits below price at the $1,666 level and is rising.

All told, the current decline does share some similar and interesting characteristics with the 2008 decline. They are worth noting. The comparison provides some helpful context and perspective to the current price action. It does not predict gold prices immediately shooting the moon, but could be suggestive that, after a seven-month storm, the weather in the gold space is getting ready for improvement. In this market, wisdom is to stay focused on the thesis, be attuned to the data, but expect the unexpected. If more weakness develops in the days and weeks ahead, keep an eye on the break of the above-mentioned trend line and a dip below the 100-week moving average for possible turning points.

As for weekly performance in the precious metals space, the yellow metal was down .23%, silver was down .64%, platinum had a big week, rallying 2.61%, and palladium lost .70%. Gold miners dramatically outperformed the metals, as seen by the HUI Gold Miners Index, up 3.08%. IFRA, the I Shares US Infrastructure ETF, was up 1.51%. Oil was up modestly at 0.76%, while natural gas prices kept pace, up 0.73%. Oil Services (OIH) underperformed oil prices slightly, up 0.33%. CRB Commodity Index was off by 0.55%. The Dow Jones US Real Estate Index ended the week up 0.67%, while the Dow Jones Utilities was up 0.27%. The US Dollar Index was slightly stronger on the week, up 0.18%.

Enjoy the weekend!

Best Regards,

David McAlvany
Chief Executive Officer
MWM LLC