Gold is finally taking a breather following its sharp rise to a 4½ year high. It had risen too far, too fast and the current decline is a normal downward correction in an ongoing bull market.
Bullish factors
Keep in mind, many don't believe this gold rise is for real and since it's really just beginning, there's lots of nervousness and disbelief, especially from Wall Street. That's actually better for us because, based on sentiment, it means this bull has further to go .
Plus, government spending is too high and debt is building fast. And with the Dollar now falling sharply and the Fed pumping the money supply, it all adds up to inflation. Commodity prices are starting to rise too, in part thanks to the weak Dollar. The CRB index is now clearly bullish and that's also very bullish for gold. It means prices in general are headed higher and we all know that gold rises with inflation.
At the same time, stocks are falling sharply and we're seeing the aftermath of the economic and stock euphoria of the 90s, the ongoing deflating bubble as well as terrorism concerns, which are also adding fuel to gold's bull market. In addition, the rise in gold and other tangible assets are telling us that the pendulum is starting to swing gold's way for the first time in 20 years. It's not casual by any means.
Inflation isn't a problem today, but it will be if the Dollar falls further and considering the soaring money supply and its inflationary implications. Keep in mind, Alan Greenspan has created more money than all of the Fed chairmans combined since the Fed was created in 1913!
Gold's 8 Year Cycle:
We don't think it's a coincidence that gold's eight year cycle is coinciding with all these factors. Chart 1 is exciting because it shows that gold's been very consistent ever since it began trading in the free market.
 As you can see, gold has experienced a major low every eight years since 1969. Sometimes it was on the short side, like seven years in 1976, or on the longer side, like 8½ years in 1985, but the point is, it's consistent.
The chart identifies this repetitive pattern and the last low occurred in February 2001, right on the eight year mark!
Most interesting, each eight year cyclical low was followed by a rise that lasted three to five years, with the average being 3½ years.
Rising on course So far, gold is following the pattern. It's been rising from the 2001 low for almost 1½ years now. It's in a bull market above $286, the 65-week moving average, and it's on course to rise further. If the past is prologue, we could now see gold continue to rise until at least the end of this year, which would be the short side. February 2006 would be on the long side and the average would be until 2004.
Note that two of the four rises occurred in the 1970s during the roaring bull markets. The other two were moderate bulls in 1985-87 and 1993-96.Corrections are part of any bull market and some can be volatile. For now, a correction would be normal and it could last a month or so, considering that gold has moved up too far, too fast.
The worst performing rise was in 1993-96 and the current rise has already had a similar gain in a shorter time period. We think we can safely discard that bull market because the environment was so different then. That was the start of the tech boom whereas now we're in the tech bust.
Taking the next moderate bull of 1985-87, it produced a gain of 72% in almost three years. This means a similar moderate bull today could reasonably take the gold price to the $440 level.
Powerful start But this time is different. So far, gold is behaving a lot more bullishly than since the late seventies.
No doubt, gold's off to a powerful start. It's still to be seen if the wild moves of the seventies return, but we believe a better performing bull market lies ahead compared to the 80s and 90s.
Mary Anne and Pamela Aden are internationally known investment analysts and editors of The Aden Forecast, a market newsletter providing specific forecasts on gold, gold shares and other major markets. Click here to visit their website at http://www.adenforecast.com
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