Monday, July 27, 2015

Long-Term Gold Outlook- A Bold Prediction

When Gold reached a peak of $1923.70 in September 2011, most analysts thought the metal would soar to $4,000+. When sentiment is extreme, and the right technical conditions are in place, markets reverse. Gold is no exception to this principle. Now, with Gold down 44% from its peak, the financial media and pundits have all but lost hope for the metal. This is the type of environment that is conducive to short-term bottoms in markets. But that's not what this post is about.

While Gold is certainly oversold and may rally in the short to intermediate term, longer term, Gold is in a bear market. Most analysts, even the ones that were bullish at the 2011 top, now admit this, even if they call it a "correction in a bull market". What is not a majority opinion by any means, is that Gold has actually been in a bear market since January 21, 1980, when the metal went parabolic and topped at $850 an ounce with the peak in inflation. It subsequently crashed 70% in a long, drawn out bear market that lasted 21 years into 2001. Some say the bear market ended in 1999, however, prices very nearly matched their 1999 low in 2001 in nominal terms, and made new lows in real terms (adjusted for inflation). I have deflated the price of gold using the Producer Price Index, and it bottomed in 2001. What this suggests, is that Gold as a commodity bottomed in 2001.

From the 2001 low, Gold advanced for 10 years into the 2011 top. However, looking back in history, this top was not anywhere near as parabolic as the spike up into 1/21/1980. It is more characteristic of a b-wave advance, than that of an impulse. This Article from an analyst whom I highly respect, although don't entirely agree with, Doug Casey, highlights the fact that the advance this time around in Gold was nowhere near the magnitude that the bull market that peaked in 1980 was. He also points out the fact that measures used to suggest Gold reached its 1980 peak in inflation-adjusted terms are wrong, and instead refers to measures used by John Williams of Shadow Government Statistics, by far the authority on exposing government lies in economic reporting. While Casey uses this as evidence the bull market didn't yet end, I contend it is rather evidence that the entire rally was not a bull market at all, but rather a rally in a much longer-term bear market. Further evidence of the three wave corrective advance comes with the near 1.618 Fibonacci relationship between waves C and A, a common characteristic of three wave corrective moves.

Note: This chart is not drawn to scale. It is tough to say how long the Gold bear market will last. However, a significant low should occur with the next deflationary low.

Short to intermediate term, the counter-trend rally in Gold could coincide with the initial drop in stock prices, as gold is initially perceived as a "safe haven", but then ultimately will not be able to withstand the deflationary pressures, and all assets will fall in value together, just like 2008, except to an even greater degree this time around.

The XAU Gold and Silver Index,an index that tracks Gold and Silver Mining Companies, has collapsed by 80% since its 2010 high. Gold and Silver mining companies will need to consolidate in order to survive, while others will go bankrupt. This will be a positive in the end, as the old makes way for the new, and new companies will emerge when precious metals reach a final low and a new sustainable bull market begins.

Further evidence of the ongoing gold bear market can be found in the Kondratiev cycle. The Kondratiev "Summer", a period of high inflation and slow growth in an economy, ended in the early 1980's, in my view kicked off by the top in Gold, a measure of inflation. The price of gold does not actually fluctuate. Gold can buy roughly the same amount of goods and services that it could many decades ago. What has changed, are values of measuring units, fiat currencies They have been devalued by the inflation of credit all throughout the globe. As the Kondratiev "fall" season progressed, it was the time to be invested in risk assets, and not in commodities, as dis-inflationary forces took hold. What follows the speculative dis-inflationary Kondratiev "Fall", is Kondratiev Winter, a period in which debt and excesses are purged from the system, which began in 2000, and which central banks have been fighting. My contention is, Gold as a measure of inflation, should move below the 2001 low prior to a new bull market beginning. The reasoning for this bold call is that the deflationary low should occur below the dis-inflationary low. Whether this occurs in Gold, remains to be seen. The uncertainty comes with the fact that in the 1930's Gold was used as currency, whereas today, it is not. It was, and still is, the only real money in the system, but the debt accumulation that has occurred over the past 30+ years has been denominated in fiat currencies, not Gold. Therefore, as the debt deflates, it is U.S. Dollars and other fiat currencies that will be in demand, not Gold. This of course completely turns on its head the conventional notion that Gold is a safe haven, and the notion of the "race to the bottom" with currencies we so often hear about. But, market fool people. And, this dynamic is simply another manifestation of this principle. All commodities should be under pressure as the most severe deflation in U.S. History takes hold. The fact that the CRB index of commodities, is nearly back to its 2009 lows, is a sign of trouble around the globe, and it's a hint at what is coming, not an inflationary bout, but a deflationary one.

Of course, nobody knows the future for sure, this is all speculation. I could be wrong in my prediction, but in my estimation, it is a well-founded one that has merit. Time and the market will be the ultimate judge.