by Jim Rickards, DailyReckoning:

Is the latest gold rally for real?

Investors can be forgiven for asking that question. Gold reached an all-time high dollar price of $1,898 per ounce on September 5, 2011. Then it began a relentless four-year, 43% plunge that took it to $1,058 on November 27, 2015.

Of course, gold did not go down in a straight line. There were numerous strong rallies along the way.

Gold rallied 13%, from $1,571 in June 2012 to $1,780 in October 2012. Then gold rallied 15%, from $1,202 in December 2013 to $1,381 on March 2014. Gold rallied 22.5% again, from $1,058 in November 2015 to $1,366 in July 2016, just after the Brexit vote in the UK.

If you were fortunate enough to buy each dip and sell at each high, lucky you. I don’t know anyone who actually did that. More common behavior is to buy near the interim tops on euphoria, and sell at the interim lows on depression. That’s a great way to lose money, but unfortunately it’s exactly how many investors behave.

With that said, no one can blame investors for being discouraged and skeptical about the price action in gold. Every rally since late-2011 was followed by a sickening plunge.

Perhaps the worst plunge was the dizzying 24% plunge, from $1,607 to $1,223 per ounce, in a brief 15-week span between March 22 and July 5, 2013. That period included the notorious “April Massacre” when gold fell over 5% in just two trading days.

Each time gold experienced one of these major reversals, investors were quick to claim price manipulation by dark forces, usually central banks, using highly-leveraged “paper gold” dumps on the commodity futures exchanges.

Actually there is strong statistical and forensic evidence to support the gold price manipulation claims, as I explain in my 2016 book, The New Case for Gold. China has a keen interest in keeping gold prices low because it is on a multi-year, multi-thousand ton buying spree. If you were buying 3,000 tons in a thin market, you’d want low prices too.

Of course, all of that will change when China reaches its gold reserve target of 10,000 tons — surpassing the United States. At that point, it will be in China’s interest to become more transparent and let the price of gold soar, which is another way of saying the value of the dollar is in free-fall.

China’s endgame may still be a few years away. Meanwhile, there are other more prosaic explanations for the long decline in gold prices from 2011 to 2015.

The best explanation I’ve heard came from legendary commodities investor Jim Rogers. He personally believes that gold will end up in the $10,000 per ounce range, which I have also predicted. But, Rogers makes the point that no commodity ever goes from a secular bottom to top without a 50% retracement along the way.

The calculation of a retracement necessarily relies on certain assumptions about which baseline to use for the analysis. For instance, gold fell, but traded in a narrow range between $490 per ounce in November 1987, and $255 per ounce in August 1999.

From there, gold turned decisively higher and rose 650% until the peak in 2011. So, the August 1999 low of $255 seems like a reasonable baseline for a retracement calculation.

Based on that, gold rose $1,643 per ounce from August 1999 to September 2011. A 50% retracement of that rally would take $821 per ounce off the price, putting gold at $1,077 when the retracement finished. That’s almost exactly where gold ended up on November 27, 2015 ($1,058 per ounce).

This means the 50% retracement is behind us and gold is set for new all-time highs in the years ahead.

Still, investors have been disappointed so many times since 2011 that they remain skeptical. Why is this rally different? Why should investors believe gold won’t just get slammed again?

The answer is that there’s an important distinction between the 2011-2015 price action and what’s going on now. The four-year decline exhibited a pattern called “lower highs, and lower lows.” While gold rallied, and fell back, each peak was lower than the one before and each valley was lower than the one before also.

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