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With the gold
price pushing to new 25 year highs, it is probably a good time to take stock
of the longer term picture to see where the gold price might be heading. This
will also enable us to see how far we have progressed into the new bull
market.
I regard the
following point and figure chart of the gold price as being of extreme
importance. It is a 5 point/$5 reversal point and figure chart using only
closing prices. That means that only moves of $25 or more are reflected in
the chart. This, combined with the use of closing prices only, eliminates
most of the froth and "atmospherics" in the market and gives one a
clear long term picture of what has happened. This chart of the gold price
goes back to 1982 and depicts very clearly the massive quarter-century long
base that has formed under the $500 level, from which there has recently been
a dramatic upside break-out.
 
There are
various methods of determining price objectives from point and figure charts.
In this case I will use the base count. The longer or wider the base, the
higher the price objective will be. The method of calculation is to add up
the number of columns in the base, multiply by the number of blocks in a
minimum reversal and multiply by the value of each block. Then add the top
price in the base, i.e. the breakout point.
It may sound
complicated but it is not. In the chart above the base actually extends
further left, prior to 1982, so we cannot get the exact number of columns. There
are however at least 150 columns visible, so we can use that as the size of
the base. It is a 5 block reversal and each block represents $5, with the top
of the base at $500.
The
calculation is thus 150x5x$5 = $3,750 + $500 = $4,250. This figure of $4,250
is the price objective that can theoretically be achieved over the long term
from the support offered by this base.
Naturally $4,250
is a long-term target, not something that will be achieved next month or next
year. Its great benefit is giving us an idea of what is possible in this new
bull market. I believe that the recent break above $500, combined with the
changing characteristics of the gold market, are
clear evidence that gold is in a new bull market.
If we look at
the potential peak as being about $4,250 and the start of the bull market
being around $250, we can immediately see that only around 7% ($300) of the
bull market's upside potential has been exhausted. In other words, this gold
bull market is in its very early stages when viewed in this long term
perspective.
As always there
will be downside corrections along the way, some of which may be of scary
proportions. It will be important to keep this long term perspective in mind
as those corrections will obviously be very good opportunities to increase
ones gold and gold share holdings.
A shorter term
price objective can be calculated from the vertical column that took gold
above $500. This column contains 13 blocks which multiplied by $25 gives $325
as the potential upside move from the base of the column. The base price was $460, so the shorter term price target
is $460+$325= $785.
Another important
change that should be anticipated will be in the gold
"over-bought/over-sold" and sentiment indicators that have been
developed and used over the past 25 years. This was a period mainly of bear
market and the early "wall of worry" stage of the bull market. These
levels and indicators will be found wanting or will simply fail to give any
practical signals as we move into the new bull market. Eventually they will
be discarded and new indicators appropriate for the new bull market will be
developed.
When 90% of
people are bullish, the gold price will be above $4,000. Currently only a
very small percentage of the financially astute community
have any idea of what is happening in the gold market. The wider
public have no idea whatsoever about gold, unless they are French or have
lived in countries that have destroyed their currencies, such as Zimbabwe.
Alf Field
Disclosure and Disclaimer
Statement: The author is not a disinterested party in that he has personal investments
gold and silver bullion, gold and silver mining shares as well as in base
metal and uranium mining companies. The author’s objective in writing
this article is to interest potential investors in this subject to the point
where they are encouraged to conduct their own further diligent research.
Neither the information nor the opinions expressed should be construed as a
solicitation to buy or sell any stock, currency or commodity. Investors are
recommended to obtain the advice of a qualified investment advisor before
entering into any transactions. The author has neither been paid nor received
any other inducement to write this article
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