Gold may be nearing its next major leg up.

No investment ever goes straight up or straight down. During the last bull market in gold, the precious metal rose 2,329% from a low of $35 in 1970 to a high of $850 in 1980. However, during that time, there was a period of 18 months in which gold fell nearly 50% (see the chart below).

As you can see, from mid-1971 to December 1974, gold rose 471%. It then fell 50%, from December ’74 to August ’76. After that, it began its next leg up, exploding 750% higher from August ’76 to January 1980.

Now, in its current bull market (2001 to March 2008), gold rose over 300% from $250 to a little over $1,000. And just like in the mid-70s, it began showing signs of weakness after its first big rally up to $1,014 in March ’08. At one point, it even fell to $700, a 30% retraction.

Granted, it wasn’t a full 50% retraction like the one that occurred from 1974-76. But we are experiencing a financial crisis. And gold is the most common catastrophe insurance.

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If we were to go by the historic pattern of the gold market in the ‘70s, gold should experience upwards resistance for 19 months after its first peak today. Gold’s recent peak was $1,014 in March ’08 (roughly 17 months ago).

If this bull market parallels the last one, then gold should renew its upward momentum in a very serious way starting in October 2009. And this next leg up should be a major one (the biggest gains came during the second rally in gold’s bull market in the ‘70s).

The chart certainly forecasts a major move.

As you can see, gold has formed a long-term inverse head and shoulders formation (two smaller collapses book-ending a major collapse). Typically a head and shoulders predicts a massive collapse. However, when the head and shoulders is inverse, as is the case for gold today, this typically predicts a MAJOR leg up.

Indeed, any move above the “neckline” of 1,000 would forecast a MAJOR move up to $1,300 or so. Going by history, this is precisely the move we should expect: remember based on historical trends (the gold bull market of the ‘70s) gold should begin its second and largest leg up in September or October 2009.

Watch the gold chart closely over the next month or so. If gold makes a move above $980 perhaps add to your current positions. If it clears $1,000, hold on tight, cause the next leg up in this secular bull market has begun.

Good Investing!

Graham Summers

Last 5 posts by Graham Summers

• We're Soooooooo Close! - October 9th, 2009
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