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Let’s skip forward to 2002-2005 and again look at the same index against the price of Gold and look what we see…de ja vu all over again. When the index is high, Gold rallies and when low, it gets spanked. Is it that simple? Yes!

Fundamental Lesson Three: The future price of gold is heavily influenced by what the Commercials do

2+2=4  (Or How To Trade Gold)

Look at what happened to Gold in late 2004. The Commercials have become heavy sellers and…and…did a bell just go off? I said “late 2004.” Isn’t that the time when Gold usually declines in phase with its seasonal pattern?  Oh, “Gosh, I almost forgot. That sure enough is.”

And 2+2+2=Bingo

So, you see how we can combine a seasonal pattern with the Commercials. Now please go back to the valuation model I discussed at the first of this article and see if Gold was over or undervalued at the end of 2004.

Assuming you did that, you will have noticed Gold was overvalued. At the time the seasonals pointed to a decline, and the Commercials were large sellers.  What more do you need?  Is it that easy? Yes !

Depressions/Recessions and Stockmarket crashes  

“Just wait until the market crashes and the economy goes to hell…then Gold will scream and the idiots will pay”…I’ve heard that and similar verses to the point I’m angry. These people are the idiots …they have not studied the past. Gold did not have a rip-roaring bull market in 1929, or in the crash of 1970, or during the largest one month decline in history in 1987. W hen markets around the world toppled in 2000 with the NASDAQ losing 75% in value, did Gold soar to the moon?

Nope. Gold barely rallied. I rest my case. Stock market crashes and depressions do not put gold higher. To that end, here is a chart of Gold with a chart of the Dow 30 underneath it. Perhaps you can see what I can’t. But for the life of me, I do not see any association with large rallies in the Gold market and stock market declines. Go ahead. See for yourself.

Let’s look past 1990 and see what happened in the crash of 2000. A crash heard around the world as economies went into a tailspin and unemployment approached 9% throughout Europe.

While stocks plummeted, Gold also declined and then had its best rally from about the start of 2002 to approximately mid-2002. At that same time stocks were rallying! When stocks bottomed in early 2003, guess what? Gold bottomed and rallied in harmony with the stock market rally.

Point Counter-Point: Gold does not rally when stocks or economies collapse

I can almost hear you now saying, “OK smart guy, when does Gold rally based on market forces you have not mentioned earlier?”

My best answer is that when inflation goes berserk, expect Gold to rally. The great Gold bull market of 1979-1980 took place when Jimmy Carter, perhaps the worst President since FDR, was in power. Inflation and interest rates soared.  Gold rallies when there is money around, and it is afraid of losing purchasing power. In depressions and recessions there is no money around to buy much of anything, anyway.