A Gold Bull Market & the Clash of the Mega-Cycles

Last year was the year the banks screwed up. This year is the year we all pay for it.

That’s one way of explaining gold’s US$18 move in U.S. trading. The Dow is now below the levels it touched at the peak of the August credit crisis. And it rests about 650 points above a 52-week low.

The ASX/200 opened down by 1% this morning and threatens to dip below 6,000. That’s about 500 points above its own 52-week low. With a 10% correction already accomplished, will the local market keep shadowing the Dow down? Or will commodity shares decouple from financial shares? Or…another alternative…will shares decouple from tangible assets? We have an answer…or at least an attempt at an answer.

You’ve got two major cycles at work. One is “deflation” in financial assets. The other is inflation, which shows up in a rising gold price (falling dollar relative to tangible assets and precious metals.” This means you could see rising commodity prices AND falling share prices, even for commodity producers. Weird. But it’s already happening with gold.

February gold closed at US$880.30. Where will it go for the rest of the year? In the December issue of Outstanding Investments our lead story was called, “Clash of the Mega-Cycles: How gold and financial assets will battle for market leadership in 2008… and why gold will win.”

The argument is simple. Financial assets (stocks) went up in the massively long low-interest rate cycle. Now that credit is getting tighter (thank you ANZ!), financial assets are falling…and falling…and falling. Gold, which cannot be printed by Ben Bernanke, is the quintessential non-financial asset.

The trouble with all this, as we discussed with Outstanding Investments editor Al Robinson, is what to do about it. Gold stocks have not tracked the recent move up in gold. In fact, Al watched in amazement yesterday as his favourite Aussie gold stocks kept getting cheaper. What gives?

Shares early. Bullion late. That’s the old adage about the last great gold bull market. Shares lead bullion’s rise in the early stages of gold’s bull market as investors engage in a garden variety rotation away from risk and into safety. They buy gold shares. Not bullion.

But late in a gold bull market, the bullion out performs. Why? Well, in a true financial crisis, gold stocks behave more like stocks and less like gold. Bullion, which has no debt, no earnings, and no management, is free to go up. And go up it does as investors switch from casual concern to real fear.

That raises the question of whether we are in the latter stages of a gold bull market right now, where bullion outperforms shares in one giant “super spike.” If that’s the case, gold could go to US$1,000 quite easily. But would it mean the end of the precious metal bull market? Or just the end of this phase?

That’s what Al and our currency and commodity analyst Gabriel Andre are looking at in the January issue of our resource publication. We’ll let you know what they come up with.

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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