Why The Gold Price Keeps Flopping Around
We've looked at the gold price from the technical side, the side that traders focus on. After a few sessions of this, the price edged a bit higher rather than lower. So maybe this correction or consolidation is over?
Not so fast. All the technicals still haven't proved anything. We're still below the high and above the serious support levels, so we're still in some sort of range. So let's look at the price of gold from another point of view. It's a "big picture" view.
First, you have to know that gold has gone up every year for the last ten years. Not only is this impressive, but, my studies turned up a rather astounding fact: no other asset has ever gone up ten years in a row. In fact, if you go all the way back to records of not only on the New York Stock Exchange, but also the London Stock Exchange (which is older), you find that even stocks, during their strongest bull runs, never went up ten years in a row. This is pretty remarkable when you consider the great U.S. bull market in stocks that began in 1980 and ran until 2007; it also covers the years when Great Britain pretty much ruled the world (at least commercially) in the late 18th century through much of the 19th century.
(Of course, you probably haven't heard much about this - but that's a story for another time.)
And throughout this entire bull run, we haven't really had any serious corrections. Even the current correction - which has people talking about a gold "bubble," the end of the gold bull run, and all that other nonsense - even this correction isn't even a 10% correction. Here's how you figure it:
The high for gold was 1,420. I'm writing this as the price hits 1,353. Subtract 1,353 from 1,420: 1,420 - 1,353 = 67. Divide 67 by 1,420: 67/1,420 = 4.7%, Big deal. In fact, you'd have to call it a consolidation, not a correction.
Remember that gold had a significant run-up during the latter part of 2010, peaking on December 31st. And the thing about big run-ups is that no item goes up forever. The item, in this case gold, has to rest.
So without getting bogged down in all the technical stuff, you simply have to step back and look at gold in the same way you'd look at any other item and use your knowledge and some common sense. And that's how you come up with this perfectly natural response to a big run-up: a rest.
On the other hand, if we're not sure we're done with this consolidation - or if this consolidation does become a real correction - then it's perfectly natural to wonder just how severe it might become. Again, while there are lots of technical studies you can take a look at, let's stick with this "big picture" view and see what we come up with, OK?
The way I'm approaching this is to talk a bit about the "50% Principle." Hang on because this might get a bit "scary."
Where do I get the 50% Principle from? It comes for a guy named George Schaeffer who was the reigning expert on the "Dow Theory" right through the mid-1970's. It's one way I look at prices when they rise and fall, specifically when I'm watching an item in a bull or bear market.
To start, you take the low for the most recent move and subtract it from the high. For gold, the most recent low was 696 in October 2008. Subtract it from the high of 1,420: 1,420 - 696 = 724. So from October 2008 rose $724 to its high in December 2011 of $1,420. Note that this is a rise of 104% in just a little over two years. That's a steep climb; no wonder gold is tired.
Back to the 50% idea. Now you divide the difference between the low and high by 2: 724/2 = 362. So half, or 50% of the rise of 724 gives you 362. Then you subtract 362 from 1,420: 1,420 - 362 = 1,058.
So if gold drops to the 1,050 area, it wouldn't be anything crazy - just scary. Why wouldn't it be crazy? First, the last time gold was in a bull market - in the 1970's, it had some big drops, one of which was 50%, so there's precedent for gold. But more important to me is the fact that the 50% Principle helps us to figure out whether large corrections (when they happen) are a reversal of the primary trend, or whether they are truly corrections. With gold, if we got a drop of 50%, but not more than that, we'd conclude that the bull market in gold is still intact and invest accordingly.
Of course, knowing about the 50% Principle doesn't make drops of 50% any less scary.
Then again, maybe gold will just consolidate for an extended period of weeks or even months, until it starts heading up again.
Not so fast. All the technicals still haven't proved anything. We're still below the high and above the serious support levels, so we're still in some sort of range. So let's look at the price of gold from another point of view. It's a "big picture" view.
First, you have to know that gold has gone up every year for the last ten years. Not only is this impressive, but, my studies turned up a rather astounding fact: no other asset has ever gone up ten years in a row. In fact, if you go all the way back to records of not only on the New York Stock Exchange, but also the London Stock Exchange (which is older), you find that even stocks, during their strongest bull runs, never went up ten years in a row. This is pretty remarkable when you consider the great U.S. bull market in stocks that began in 1980 and ran until 2007; it also covers the years when Great Britain pretty much ruled the world (at least commercially) in the late 18th century through much of the 19th century.
(Of course, you probably haven't heard much about this - but that's a story for another time.)
And throughout this entire bull run, we haven't really had any serious corrections. Even the current correction - which has people talking about a gold "bubble," the end of the gold bull run, and all that other nonsense - even this correction isn't even a 10% correction. Here's how you figure it:
The high for gold was 1,420. I'm writing this as the price hits 1,353. Subtract 1,353 from 1,420: 1,420 - 1,353 = 67. Divide 67 by 1,420: 67/1,420 = 4.7%, Big deal. In fact, you'd have to call it a consolidation, not a correction.
Remember that gold had a significant run-up during the latter part of 2010, peaking on December 31st. And the thing about big run-ups is that no item goes up forever. The item, in this case gold, has to rest.
So without getting bogged down in all the technical stuff, you simply have to step back and look at gold in the same way you'd look at any other item and use your knowledge and some common sense. And that's how you come up with this perfectly natural response to a big run-up: a rest.
On the other hand, if we're not sure we're done with this consolidation - or if this consolidation does become a real correction - then it's perfectly natural to wonder just how severe it might become. Again, while there are lots of technical studies you can take a look at, let's stick with this "big picture" view and see what we come up with, OK?
The way I'm approaching this is to talk a bit about the "50% Principle." Hang on because this might get a bit "scary."
Where do I get the 50% Principle from? It comes for a guy named George Schaeffer who was the reigning expert on the "Dow Theory" right through the mid-1970's. It's one way I look at prices when they rise and fall, specifically when I'm watching an item in a bull or bear market.
To start, you take the low for the most recent move and subtract it from the high. For gold, the most recent low was 696 in October 2008. Subtract it from the high of 1,420: 1,420 - 696 = 724. So from October 2008 rose $724 to its high in December 2011 of $1,420. Note that this is a rise of 104% in just a little over two years. That's a steep climb; no wonder gold is tired.
Back to the 50% idea. Now you divide the difference between the low and high by 2: 724/2 = 362. So half, or 50% of the rise of 724 gives you 362. Then you subtract 362 from 1,420: 1,420 - 362 = 1,058.
So if gold drops to the 1,050 area, it wouldn't be anything crazy - just scary. Why wouldn't it be crazy? First, the last time gold was in a bull market - in the 1970's, it had some big drops, one of which was 50%, so there's precedent for gold. But more important to me is the fact that the 50% Principle helps us to figure out whether large corrections (when they happen) are a reversal of the primary trend, or whether they are truly corrections. With gold, if we got a drop of 50%, but not more than that, we'd conclude that the bull market in gold is still intact and invest accordingly.
Of course, knowing about the 50% Principle doesn't make drops of 50% any less scary.
Then again, maybe gold will just consolidate for an extended period of weeks or even months, until it starts heading up again.
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