Markets: News  

Mark Hulbert

Has a major bear market in gold begun?

6/29/12 12:01 AM ET (MarketWatch)Print

CHAPEL HILL, N.C. (MarketWatch) -- The gold market has been so frustrating of late that even some contrarians are throwing in the towel.

After hitting a bull market high last September at over $1,900 an ounce, gold bullion (GCQ2) fell more than 15% through the end of the year. Over the first two months of this year it rallied strongly, rising to around $1,800, but thereafter faltered -- and trades today at more or less where it stood at its late-December low.

Contrarian analysis acquitted itself creditably during much of the last year -- until the end of this year's first quarter:

In early February, for example, as gold's early-2012 rally was gathering steam, contrarian analysis suggested that the rally would "soon come to an end." (Read my Feb. 3 column, "Gold's rally will soon come to an end.")

By early March, after gold had already fallen $120 an ounce from its late-February peak, and sentiment began to move in the right direction, contrarian analysis foresaw a "buy signal in coming weeks." (Read my Mar. 7 column, entitled "Gold market sentiment finally improving.")

By Apr. 10, I could report that gold's sentiment foundation was now solidly bullish, with the average gold timer more discouraged than they had been in three years. (Read my Apr. 10 column, "Gold's sentiment foundation bullish.")

Unfortunately, despite a consistently bullish conclusion from contrarian analysis ever since, gold is today about $120 per ounce lower than where it stood when that April 10 column was written.

Might gold's continual failure to respond to positive sentiment conditions mean that bullion has entered into a major bear market? That possibility needs to be taken seriously.

But a major new study of commodity bull markets since 1800 suggests that the bull market that began around the turn of this century is not yet over. And since the underlying factors that lead to a commodity bull market are largely the same as those that would propel gold higher, this finding is good news for gold in particular.

The study was conducted by two commodity analysts at Ned Davis Research: John LaForge and Warrien Pies. They studied all major commodity bull markets over the last two centuries, and came up with six themes that were largely present when those past bull markets came to an end. Because just one of the six is present today, and only one more is even close, they conclude that it's unlikely that "commodities have met their final end."

Those six themes are:

Past commodity bull markets have tended to end abruptly. They "typically burst in the end, similar to other asset bubbles," LaForge and Pies write. This is not how the commodity market has behaved over the last couple of years.

Length of cycle. This is the one theme that the analysts classify as "close" to being satisfied, since the bull market that began at the turn of the century is now within a year or two of matching the average of all past ones since 1800.

Stretched valuations. LaForge and Pies admit that measuring commodities' valuation is not as straightforward as it is for stocks or bonds. But they insist it is possible to compare commodity prices to their long-term trends, as well as to that of other asset classes. And some of those comparisons -- though, interestingly, not all -- show commodity valuations to be "stretched."

Contracting money supply. LaForge and Pies acknowledge that global money supply growth has been slowing over the last six to nine months. But they conclude that this is not enough to reverse the trend of the last couple of years of a rapidly expanding global money supply (though this definitely deserves close attention).

A spike in real interest rates. The two analysts stress that past commodity bull markets have thrived on low real interest rates. "One of the strongest pieces of evidence to suggest the bull continues," they write, is that real rates today remain historically quite low.

Stocks are poised to enter into a long-term, secular, bull market. LaForge and Pies do not detect many of the preconditions that have spawned past secular bull markets.

Don't get carried away, however. While the two analysts believe the commodity bull market is not yet over, and therefore that new highs for commodities generally lie ahead, they also believe that the current commodity bull market is far closer to its end than its beginning.

In other words, its final end could very well be not that far away. Do not become a perma-bull.