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Precious metals investment terms A to Z

Cycles

A cycle is a situation or process where something is regularly repeated with the passing of time. Seasons are the most straightforward examples of cycles: after spring is summer, then autumn, winter and once again spring, etc. Other cycles found in nature include days and nights.

Cycles exist throughout our lives. This term is used in science, economics, music and even everyday life. Cycles have been analyzed for hundreds of years because people have always been curious as to why some things are identified by their repeatability. From a theoretical point of view, a cycle is a situation or process where something is regularly repeated with the passing of time. Seasons are the most straightforward examples of cycles: after spring is summer, then autumn, winter and once again spring, etc. Other cycles found in nature include days and nights.

All human activity depends on nature's cycles. In the morning people go to work and in the evening they come back home, this process constantly repeating. Paying monthly bills or regular trips to the grocery store are also examples of cyclical behaviors.

One result of human activity is the business cycle. Business cycles are up-and-down movements in economic activity, measured by various indicators. In the past, business cycles were thought to be regular with a fixed length, but today they are considered irregular and the length of their duration random.

Cycles also occur in capital markets as a fluctuation in the values of various indicators. If an investor knows the phase of a cycle he is able to gain profit and earn money. Moreover, one of the basic principles of technical analysis is that history repeats itself (if you ask us, it seems more like it rhymes). This principle is backed up by the observation that tops and bottoms occur after similar periods of time.

After this short introduction, now for some theory. Firstly, it is important to know what a typical cycle looks like. Chart 1 below illustrates a standard cycle which consists of 4 phases:

  • phase of decline - indicator values decrease
  • phase of depression - cycle bottom, end of decline
  • phase of growth - indicator values increase
  • phase of development - cycle peak, end of growth

Chart 1. Phases of typical cycle.

The next point to be highlighted is the fact that cycles differ from each other in length of duration (Chart 2 below shows an example). Short-term cycles (red plot) are very sensitive to economic changes and last only briefly. Cycles with a very long duration from beginning to end are called long-term (yellow one). And medium-term cycles have a duration between short- and long-term. Multiple cycles can overlap and combine, leading to the formation of another cycle. Under certain conditions two short-term cycles can form a medium-term cycle, which might in turn be a part of a long-term cycle (the green plot below is a combination of the red and yellow).

Chart 2. Example of cycles with different duration. The yellow plot is twice as long as the red plot. The green plot is the sum of the red and yellow.

Basic cycle theory is not the only way to identify business cycles and economic trends. To be specific, cycles are a special form of so-called turning points. Turning points are recurring moments where investors buy or sell shares, independently of an index's real value. In other words, investors expect some important moments but they don’t know whether those moments will create tops or bottoms. The only information they can use is the fact that a turning point will occur. Unlike cycles, turning points don’t have to look like a sine plot where peaks and bottoms occur one at a time. Of course, in real life the combinations of peaks and bottoms can come in a variety of forms, often causing problems when trying to identify them (for more information see the Turning Points definition).

The problem of economic cycles was discussed in 1860 by French economist Clement Juglar, who identified cycles lasting from 8 to 11 years. Then, in the 20th century Simon Kuznetz and Nikolai Kondratiev published studies identifying cycles lasting 15 to 25 and 45 to 60 years. These cycles are the most popular in theory, but they last a very long time so they are not very useful for traders to gain profits. In practice, analysts have to detect cycles on their own.

To sum up, cycle theory is one of the most important theories investors should consider. Knowing the phase of a cycle may help investors make appropriate decisions and increase profits. Every investor wants to know how long a bull or bear market will last, and they use many special tools to detect cycles. We also offer some professional solutions to help you in your gold & silver investments. If you are interested, simply sign up for access to the Premium Section where you will find a number of valuable tools and charts.

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