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(Ian Barrett/The Globe and Mail)
(Ian Barrett/The Globe and Mail)

Gold’s dip part of a secular bull market: analyst Add to ...

Is it a correction or a bear market? That’s the question gold investors have to be pondering in the wake of the yellow metal’s dramatic plunge last week to two-year lows.

Weighing in on the question is Tony Boeckh, the Montreal-based newsletter writer and head of Boeckh Investments Inc., who is of the view that it’s a natural correction in a long, ongoing bull market. In other words, the decline, which shaved nearly $200 (U.S.) off the price of an ounce of bullion, is just a pause that refreshes.

Mr. Boeckh is a big picture guy and formerly associated with BCA Research before heading out to form his own shop. Gold market action today is suggesting a better tone, with the yellow metal up 1 per cent or $15 to $1,429 an ounce in current trading.

Writing in his latest note to clients, Mr. Boeckh points out that gold has had an “exponential rise” since its bear market ended in 1999 to the peak reached two years ago of $1,920. During this long bull market, gold sustained two previous dips, one 22 per cent and the other 30 per cent. The recent drop, by comparison, has been 29 per cent, not much different.

According to Mr. Boeckh, these declines aren’t an unalloyed bad thing because they shake out weak speculators, creating a stable base from which a long term advance often can resume.

“Long-term believers in a particular asset are always pleased when aggressive speculation is liquidated and prices move to a level from which they are comfortable that better value has been established. However, during the process of liquidation, it is never evident where or when such a base will be established,” he says.

These periodic shake outs in long bull markets sometimes equal to about half the advance, which means the price could ultimately decline to about $1,000 to $1,125 an ounce, without shaking the bullish thesis for gold.

“We are not predicting such an outcome but it could occur and still leave open the possibility that, if such a decline happened, it would still be within the parameters of a bull market correction,” he says.

The main question for gold bulls is whether the factors that have been driving gold higher have changed. In Mr. Boeckh’s opinion, the answer is no.

The big four central banks (of the U.S., UK, Japan and the European Central Bank) have added $9-trillion to their balance sheets since 2007, but they’ve been unable to create a stable economy recovery.

Mr. Boeckh says that with continued weakness in the economy, there will more of this type of monetary easing and governments will slow their austerity drives, good things for gold. “The world is still struggling against a ‘contained depression.’ The antidote, given the current state of economic knowledge and the short time horizon of politicians is two fold – backsliding on fiscal austerity and increased debt monetization.”

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