Secular, cyclical, long-term, intermediate term —there's lots of technical terms analysts throw around when it comes to analyzing markets. But, what do they really mean and how can that help you understand the gold market from a macro perspective? Let's take a look.
A secular trend generally refers to the largest timeframe of all when it comes to market views —it refers to the 10-20 year major trend for a market.
Stock market investors can think back to the massive bull market in U.S. equities that started in 1980 when the S&P 500 was at 100 —yes, the S&P closed out 1980 at 135.76. From there, a 20-year secular bull market began which took the S&P 500 to a peak at 1,552.87 in March 2000. That is a secular trend.
Within secular bull trends, however, minor cyclical counter-trend bear trends can evolve. In stocks, that was seen in the fall of 1987 and the late summer-fall of 1998 to name a few. OK, so what does this have to do with gold?
Let's look back at history, starting with the infamous "bubble" in gold that took prices above $800 per ounce in early 1980. See Figure 1. That bubble collapsed sharply and quickly and from there gold settled into a long-term secular sideways (or neutral) trend. From mid 1982 until November 2005, nearby Comex gold futures largely traded between $252 an ounce and $500 an ounce. That was just over 20 years —a big long sideways secular trend for gold.
From there, some analysts believe a long-term secular bull trend for gold began, which took the yellow metal to the 2011 high at over $1,900 per ounce. From there a cyclical bear market correction phase has set in. But, is this the end of the secular bull? By definition, the time from the breakout through $500 to the all-time high was only about five-six years. Far too short for a secular trend to be over. Secular trends can last 20 years, as seen above.
Let's take a look at the monthly chart for gold to see how it stacks up using Fibonacci retracement analysis. This retracement covers the period from January 2006 (when gold was sustaining gains above $500) into September 2011. Traditional Fibonacci theory explains that markets can "retrace" or correct portions of moves without harming the larger overall trend.
While there are many variations on Fibonacci retracements, the three basic levels are 38.2%, 50% and 61.8%. It is important to understand, according to traditional Fibonacci analysis, as long as the 61.8% support level holds, the prior trend (in this instance the uptrend) will remain intact or valid. Bottom line? That means, a market can retrace as much as 61.8% of the previous bull move, but still be in an overall uptrend. Classical Fibonacci analysis teaches that if the 61.8% support area (in an uptrend) is severely violated, that mean the uptrend is over. So, let's apply this to the gold monthly chart seen in Figure 2 below.
Gold has tested on two occasions—but held the 50% Fibonacci retracement support. The 50% retracement comes in around $1,213. In June 2013, gold bears pressed the market to a low at $1,183 and in December 2013 another dip was seen to $1,182. But, on both occasions, quick recoveries were seen. The market tested, but held 50% Fibonacci retracement support. The 61.8% retracement around $1,050 has not been tested or come into play at this point. This argues that the longer-term secular trend for gold has not been harmed.
Next up, let's take a look at another view of the monthly chart of nearby Comex gold futures. This chart shows long-term moving averages and long-term momentum indicators. Nearby Comex gold futures are trading above their 100-month and 200-month moving averages. From a long-term trend perspective, the uptrend remains intact. Additionally, long-term momentum seen below the chart is generally rising and supportive.
Bottom line? When it comes to longer-term investing it is always valuable to step back from the trees and take a look at the forest. While gold has been buffeted higher and lower in recent weeks by lots of short-term noise, these measures of traditional technical analysis show the long-term secular trend isn't over yet.
Kira Brecht is managing editor at TraderPlanet.