Gold's Last Gasp?

Gold has freely traded against the dollar since 1974, having been made illegal for US citizens to own between 1933 and 1974. So if you take the price history since 1974 you can fit a curve to that data using one or another formula for fitting a line (straight line or more complex line) to data. If you then look at how the actual prices related to that line you judge to be most appropriate (the trend line), you will see that the actual prices oscillate above and below that line, sometime reaching extremes either above or below it, but the price eventually comes back toward the line and then can go to an extreme to the opposite side of the line.

It is my own view that cycles drive the price movement at times much too high above the line, and at times much too low below the line. If there were just one cycle, like the earth's annual cycle of spring, summer, autumn, and winter, then the price movement around the trend line would be so obvious and so predictable that trading would eliminate most all oscillation around the line because traders would trade in anticipation of the oscillation thus creating market forces that would prevent the oscillation. But there are multiple cycles acting independent of one another making the oscillations around the trend appear to be irregular and unpredictable, plus there are many small random events, unlike the multiple cycles, which truly are unpredictable.

Right now the trend line I use for the price of gold suggests that the neutral price is around $850 so we are around 20% above that trend value, not very extreme. Back in 2001 we reached an extreme of 50% below the then trend value, but since, in general, the price has been moving upward in relation to the trend. Before the 2001 low we reached as much as 350% above the trend back in early 1980.

If I extend the trend line forward, by this time next year (November, 2010) the trend value should be about $900, and if the price hypothetically reaches just under $2,000 the price will be 115% above the trend. This would not be as extreme as the 1980 blow off top. Of course, to predict that the price will reach near $2,000 next November, 2010, one would need to have correctly identified and measured a significant number of independent oscillations in the price movement around the trend, and projected the effect of those independent oscillations forward in time in relationship to the trend line. Of course such an analysis would also then show that the price after November, 2010 would begin to fall and fall and fall, until by 2015 it reached an extreme of under $300, and who would really believe that; certainly not anyone here who is emotionally committed to the theory of impending hyperinflation.