Long Wave analysis established the demand/supply cycle of 25-30 years up in prices and in money rates and 25-30 years down. This is explained by sentiment in part, but primarily the lengthy cycle is due to lag times, inherent in human societies, in responding effectively to increases in demand and then to lack of demand.
When world demand picked up, as it began to do in 1998-99, the suppliers of crude and finished goods were not synchronized to that demand and were ill-prepared to fill the new demand. They had kept inventories low and not adequately renewed sources since 1980 because demand for crude goods had been shrinking for two decades.
It takes a very long time even to accept that the new demand is really here to stay, and then to budget for it, plan new projects, get the land, get the permits, engineering, logistics, personnel and all the rest to bring in adequate new supply to meet the continuing demand. We've all been watching it, particularly in mining and energy production and refining, and in power production.
This process has been going on for 7-10 years in various crude goods (commodities), and it has that long or longer still to go. Prices ran up wildly the past two years after rest periods in 2004 and 2006. This more recent price escalation puts a floor under prices so that new supply development can go forward with confidence it will pay off. Producers and consumers alike are now convinced and committed.
Approximately half way through the up cycle in price inflation is a "good time" for a correction, just as approximately half way through the disinflationary down cycle was a good time for an equity correction in 1987. The perma-deflationists and those who are unaware of the economic Long Wave are now already calling for the economic "winter" or the resumption of flat out deflation. Get used to it, and "keep your eye on the ball", as they say in baseball.
Gold has been in correction already for five months and could have another year or more of sideways to down action. My long term gold price analysis has not really changed much in the past 15 years. Gold is a monetary, an industrial, and a collector commodity, so gold's price is a good monitor of the overall cycle, and it is fairly predictable. My educated guess is that gold will come down **at least** to 720-750 which was the true end of the last bull market in 1980.
Develop patience. Avoid leverage during a period of de-leveraging. Trade it or buy gold and other inflation beneficiaries in small pieces at a time on down drafts. Relax. Enjoy. It's a vacation for inflation, not the end.
Recent Comments