Was the 2006 gold price peak like 1980 or 1975?

Unfortunately technical analysts are divided in their conclusions. If you overlay the 1999 to 2006 bull market in gold against the bull market that finished in 1980 then the similarities are remarkable. So too are the price movements since the peak last May of $725.

However, this could still be the wrong comparison. For in the great gold bull market of the 1970s there was a very sharp correction in 1975-6 with a dramatic 50 per cent price retreat. Overlay that graph on 2006 and this also works.

Interestingly technical analysts in both camps can see further price weakness ahead from current levels, with a bottoming out this summer. Analysts who prefer to argue from market fundamentals could say it will be different this time but the short term consensus view from the technical analysts is quite clear here.

Where next for gold?

But where does the gold price go after that? History will probably repeat itself, but which section of history? 1976-1980 with its spectacular blow-off, or back to the bear market of the 1980s and 1990s?

Perhaps this shows the limitations of technical analysts rather than anything else. A myopic fascination with charts might be fine for analyzing short-term price trends but making longer term extrapolations is far more hazardous.

If we compare 1980 with 2006 for example, there are a few points worth noting. First, the previous 1980 all-time high was not passed in 2006, and if prices are adjusted for inflation then it was nowhere near.

Second, the parabolic shape of the 1980 gold price graph was just not evident last year. The rate of growth in the gold price increased but it did not go into the exponential upswing seen in real blow-offs like 1980, as in the three years before to May 2006 gold prices doubled, while in the three years before 1980 prices grew eightfold (even the three years before 1975 saw a quadrupling of gold prices, a stronger performance than in the alleged 2006 peak).

Can the charts mislead on long term trends? Well this correspondent looked back through the archives of a national newspaper to 2001 and found one of the most celebrated chartists turning decisively bearish on gold.

Trend not a friend?

Is this so surprising against the background of a 20-year bear market? Any chartist would look in his rear-view mirror and project a continuation of the previous trend.

So if we can defeat chartists on the basis of their own limited parameters of analysis, we can be forgiven for widening the debate to include fundamental factors which are very strongly supportive of the argument that a 1975-6 style correction is in place, and that a new long term bear market is not beginning for gold.

Do we not see evidence of surging global liquidity, money supply growth and rising inflation? Why should gold be cheaper today in absolute price than it was in 1980? And where will investors turn to if global asset markets collapse due to a US economic slowdown or outright recession?

In the late 1970s investors chose gold, and as the chartists like to remind us history always repeats itself.