Is gold’s bubble phase about to begin?

I think the manipulation after QE4 has accelerated the bull market. We now have the necessary conditions for the bubble phase in gold to begin. I was expecting the second phase correction (the correction that separates the second phase of the bull market from the bubble phase) to occur at the next eight-year cycle low due in 2016. However, I think the manipulation of the precious metals markets over the last eight months has probably shortened the bull market.

Contrary to what many believe, manipulation doesn't delay a market. Manipulation accelerates and intensifies the secular trend as it creates supply and demand imbalances. Once the market breaks free of the manipulation the trend reverses and ultimately goes much further and much more violently in the secular direction than would have occurred normally.

If the metals had been allowed to trade freely, then I think we would have gotten another C-wave advance into 2014, followed by a devastating correction into the eight-year cycle low in 2016. That move into the eight-year cycle low would have marked the transition from the second phase to the bubble phase.

However, the metals weren't allowed to trade freely after QE4. They were continually hit with artificial and manipulative selling in the overnight and premarket for months. I think this has converted what should have been just a normal correction into the second phase correction, and when gold breaks free it's going to deliver the bubble phase over the next two years instead of in 2017/18 that would have occurred in a natural market.

Whether you think I'm right or not, pretty much every bubble has to have one of these extreme corrections to completely cleanse bullish sentiment before starting. In 2007 oil dipped 37% convincing everyone that the peak oil crowd was idiots. Oil then rallied 200% in the next year and a half vindicating the bulls and making the critics look foolish.

In 1998 the Nasdaq corrected 40%. Everyone was convinced the secular bull had ended. It had not ended, but the correction did clean the slate and prepare the market for tech stocks to rally 300% in the next year and a half. 

Gold has just corrected 37%, miners almost 70%. No one even believes that gold will ever see $1,900 again, much less many multiples higher than that. Yet gold has now put in place the necessary conditions for a bubble to begin. And all big secular bull markets end in bubbles. Human nature never changes. 

The fundamentals driving gold have not changed. In fact I would suggest the supply side has been severely damaged as many tons of physical gold have moved from west to east during the manipulation event. That gold is never coming back. It's going to remain locked up inside eastern central banks, and in the hands of Asians for years to come. 

It's always when it appears a price trend looks least likely that major trend changes occur. 

Watch gold next week. If the bubble phase is beginning then we should see gold rebound violently as it breaks free of the manipulation. Miners in particular should rally 10%-15%.

If gold waffles around coming out of this bottom then the correction isn't done yet. But either way, whether it ended on Friday or the bottom is still ahead of us, I think this correction is creating the conditions necessary for the bubble phase to begin.

About the Author
Toby Connor

Toby Connor's website GoldScents is a financial blog focused on the analysis of the stock market and the secular gold bull market. If you would like to be added to the email list that receives notice of new posts to GoldScents, or have questions, email Toby.

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