40-Year Cycle

The 40-Year Cycle Is Still On Track
(Gold And Gold Stocks Within The 40-Year Cycle)

By Olaf Sztaba, Na-Marketletter | 11 December 2008

The extreme oversold condition of the markets should give way to a short but strong double-digit recovery rally that fits well into our 40-year cycle model (Meisels Cycle). Where do we stand? How did Gold and Gold stocks perform during the previous secular bear markets and financial crises? Let's look at the long-term picture and some strategies for the coming years.

The 40-Year Cycle

In past years, we have advocated the presence of a 40-year cycle. This cycle, also called the Meisels Cycle, is a combination of the widely followed 4-year or Dunbar cycle, and the 10-year or Decennial cycle formulated by Mr. Juglar.

The 40-year cycle suggests that the market repeats itself with a 40-year periodicy. To know what is likely to happen, we should look at the previous 40-year cycles. What we are experiencing now is some kind of repetition of the 1960-1970s and of the 1920-1930s.

What happened to Gold and Gold stocks in these two periods of high financial distress?

1929-1935

During the 1920s, the dramatic growth in investment trusts fuelled a rise in the stock market, which accelerated toward the end of the decade and quickly reached mania proportions. The buying frenzy in financial assets, as represented by the Dow Jones Industrial Average (DJIA), reached its zenith at 385 in October 1929. During the next three years, the Dow Jones Industrial Average lost 89% of its value to reach a low of 41 in June 1932.

In the initial reaction to the crash, Gold stocks had a strong decline during which Homestake Mining fell from $11.50 to $7.00 and Canadian producer Dome Mines tumbled from $5.50 to $3.00. It didn't last long. Shortly after, large investors began shifting their funds from plunging financial instruments (soft assets) to Gold stocks (hard assets). As a result, from the crash low in 1929, Homestake Mining advanced from $7.00 to a final peak in January 1936 just above $68.00, an 871% appreciation. Over the same period, Canadian producer Dome Mines advanced almost 1000%.

1974-1981

From the mid-1960s, the US market succumbed to another investment mania. The all-together-now attitude, accompanied by a highly popular use of leverage for speculation, pushed equities toward inevitable collapse. In the late 60s, the US stock market began its descent into a cyclical bear market.

As in the early 1930s, Gold stocks staged a huge comeback as investors started to shift funds from soft assets (mostly technology stocks) to hard assets (Gold stocks). Gold stocks, led by Domes Mines, Campbell Resources and Homestake Mines, to name just a few, roared to life, providing significant gains during a period of severe financial distress. The bull market in Gold and Gold stocks culminated in 1981 with Gold reaching a high of $850.

2000-2014?

Referring to the 40-year cycle, if we take history as a guide for the coming months and years, September 2000 was the end of a multi-year bull stock market phase that started in 1982-1983. The sell-off into 2002 violated the long-term up trendline on the S&P 500 index. The index then rallied into marginal [[but only nominal: normxxx]] highs in 2007 to create what some would call a 'double top'. The tone was then set for the start of a secular downtrend.

According to our 40-year cycle, we believe that we are pretty close to a medium-term cycle low that should set the stage for the next recovery rally into mid-2009. From late 2009 onward, our research indicates new lows into late 2010 or early 2011, another recovery rally within the secular downtrend into 2012, and another sell-off into 2014, which could then be the start of a new base-building process and set the tone for the next major bull market.

If history is any guide, the areas of the market that should do well during the next five years are Gold and Gold stocks (hard assets), just as in the 1929-1935 and 1974-1981 periods.

What to do?

For long-term investors:

Long-term investors should take the rise into mid-2009 as an opportunity to reduce their positions in equities and put their money into safe assets. They could offset any capital losses with previous long-term capital gains. Others may consider hedging their portfolios with put options or ETFs. The main goal should be to preserve the capital base for the next major bull move [[— as much as 10 years out: normxxx]].

At the same time, investors should watch for early signs of improving technicals in Gold and Gold stocks. The focus should remain on big-cap Gold stocks such as Barrick Gold, Goldcorp or Agnico-Eagle. Only a decisive move above the 200-day moving average would warrant a longer-term investment opportunity in these stocks.

For traders or medium-term investors:

Those with the ability to time transactions could try to participate in both the rallies and the sell-offs. There are now plenty of financial instruments to do so. We suggest, however, tight stop losses at all times. Watch Gold and Gold stocks for any signs of detachment from the general market in anticipation of a major bull market in these stocks similar to the 1929-1935 and 1974-1981 advances. We shall publish updates on the 40-year cycle along the way and strive to provide you with actionable investments and trading ideas, both in the short-term and the long-term to help you get through these challenging times. Stay tuned!

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Normxxx    
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