Best of the Week
Most Popular
1.BrExit Looks Set to Win EU Referendum, Final Opinion Polls Give LEAVE Lead Over REMAIN - Nadeem_Walayat
2.BrExit Morning - New Dawn for Britain, Independence Day! - Nadeem_Walayat
3.LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - Nadeem_Walayat
4.BrExit to Save Europe from Climate Change Refugee Migration Apocalypse - Nadeem_Walayat
5.Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast - Nadeem_Walayat
6.EU Referendum Latest Opinion Polls Show LEAVE Halting REMAINs Surge - Nadeem_Walayat
7.Gold And Silver – Insanity Is World “Norm.” Keep Stacking! - Michael_Noonan
8.Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - Nadeem_Walayat
9.Gold And Silver: Security, And BREXIT - Michael_Noonan
10.BrExit Vote - "The Trend is Set" -- And What You Should Pay Attention to Next - EWI
Free Silver
Last 7 days
14 Signs the World Is on the Verge of Generational Chaos - 30th June 16
BrExit Stock Market Upwards Crash as FTSE Recovers 100% of Friday Plunge - 30th June 16
Stock Market Rally Runs Out of Steam - 29th June 16
Rapid Growth:The Financial Trends Of Online Gaming - 29th June 16
FTSE and Sterling Brexit Trading, Deconstruction of the EU Referendum Result - 29th June 16
Stock Market Bounce May be Over - 28th June 16
Stock Market Meltdown Likely to Drive Gold Towards $1,500 - 28th June 16
Brexit Victory over the EU Globalists - 28th June 16
Brexit Psyop: Greenspan Falsely Blames the Brits for the Crash and Chaos to Follow - 28th June 16
Greenspan Calls Brexit a ‘Terrible Outcome’ as Euro Area Tested - 27th June 16
Stock Market SPX Below Mid-Cycle Support - 27th June 16
Best Holidays for Summer 2016 - 27th June 16
Another Stocks Bear Market? - 27th June 16
BBC EU Referendum Result Highlights - YouGov, Markets, Bookmakers, Pollsters ALL WRONG! - 26th June 16
Investors Map Post-Brexit Strategies Amid Global Market Upheaval - 26th June 16
Gold Price Weekly COT Update - 26th June 16
First the UK, then Scotland ... then Texas? - 26th June 16
Stocks Bear Market Resumes or Just More Noise - 26th June 16
Gold And Silver: Security, And BREXIT - 25th June 16
Dow, Euro & Brexit Recap - 25th June 16
Resistance Holding Gold Stocks after Brexit - 25th June 16
Venezuela vs. Ecuador (Chavismo vs. Chavismo Dollarized) - 25th June 16
Gold, Silver And PM Stocks Summer Doldrums Risk - 24th June 16
Here’s Why China “Economic Hard-Landing” Worries Are Overblown - 24th June 16
Jubilee Jolt: Markets Crash, Gold Skyrockets as Britain Takes Brexit - 24th June 16
BrExit Morning - New Dawn for Britain, Independence Day! - 24th June 16
LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - 24th June 16
Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - 24th June 16
EU Referendum Shock Results Putting BrExit LEAVE in the Lead Hitting Sterling Hard - 24th June 16
Final Opinion Poll Gives REMAIN 52% Lead, Bookmakers, Markets and Pollsters ALL Back REMAIN Win - 23rd June 16
Does BREXIT Matter? Outlook for Sterling - 23rd June 16
Keep Calm and Vote BrExit - Last Chance to Break Free of EU Superstate - 23rd June 16
Here’s the Foreign Policy Trump and Clinton Really Want - 23rd June 16
Details Behind Semiconductor Stocks Leadership - 23rd June 16
Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast - 23rd June 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Market Volaility

Gold - Are We There Yet?

Commodities / Gold and Silver 2013 Apr 07, 2013 - 12:32 PM GMT

By: Adam_Brochert

Commodities

It has been a 1.5-2 year sideways affair for the precious metals (PM), depending on whether you look at silver (peak in April of 2011) or Gold (peak in August of 2011). PM stocks, on the other hand, have done quite a bit worse than go sideways. While the more conservative Gold has only fallen a maximum of 20% from its August of 2011 highs, the more volatile silver and senior PM stock indices (e.g., XAU, HUI, GDX) have both fallen close to 50%. The junior PM stock sector has been decimated, with the GLDX ETF, as a representation of the very small cap/explorer sector having fallen almost 75% over the past 2 years.


One of the funny things about asset price declines is that they are met with the opposite emotional reaction of what is healthy. In other words, people should get more bullish as asset prices decline in an inflationary world, and yet the opposite happens. So, while Gold and silver are approaching the low end of their recent trading ranges, sentiment and trader positioning are at extreme bearish levels, just as they were last summer.

I am not a "pure" chartist or technical analyst when it comes to asset prices, but I think price charts tell a fundamental story rather well. Investing and speculating are risky ventures, to be sure, but we live in an era of global anchorless paper currencies. This means that the fruits of one's labor cannot be buried under a mattress using the official medium of exchange, as these scraps of paper (i.e. currency units) received for that labor are being thrown into the air by our masters at a pace that would make even rappers blush.

Though I thought last summer's lows in the PM sector would be enough to halt the correction and start a new cyclical bull market, one more vicious whoosh lower in the PM sector has caused all but the hard core Gold bulls to abandon the barbarous relics and the firms that waste their time digging treasure out of the ground. After all, treasure can be printed by governments and central bankstaz with a few simple key strokes, so who needs shiny pieces of metal?

In reality, we have likely just completed the 1987 crash equivalent in the PM sector when it comes to relative valuations of common stocks versus Gold. The current "Dow to Gold" ratio move has gone on much longer than I anticipated, to be sure. But it is clear to me that we are in no way positioned for a shift of the secular tides at this juncture. Here is a chart of the "Gold to S&P 500" ratio back around the time of the 1987 crash in common stocks using a weekly log scale chart:

Of course, the Gold bulls may have been a little premature in their celebration back then as this next chart shows:

And currently, we have the paperbugs rejoicing giddily in the streets as counterfeiting enormous amounts of money has propped up financial assets to the point where it seems as though Gold is once again irrelevant when compared to common stocks using the "S&P 500 to Gold" ratio:

Keeping the biggest of "big picture" perspectives in mind, here is the "Dow to Gold" ratio chart since 1980:

Now, I don't expect it will take another decade to get back to 1980-type levels in this ratio, but I'm prepared to keep riding the Golden bull that long if that's what it takes. The big money is made by sitting tight and holding on during a big bull market. Those who held common stocks thru the 1987 crash certainly didn't regret it for long. Meanwhile, using silver as a more volatile proxy for the Gold bull market, it seems as though we may be at the end of a big 4th wave-type correction that suggests a mania phase dead ahead:

If you accept this Elliott Wave labeling (not saying it is correct - this is just an opinion), it would suggest that the first wave resulted in a roughly 5.3 fold gain and the third wave roughly a 5.9 fold gain. Thus, since the first and third waves are roughly of equal magnitude, the fifth (and final) wave higher is likely to be of the extended variety and thus perhaps a 9-11 fold gain is coming. This would mean a peak for silver in the $200-$300 USD per ounce range. To anyone who thinks this is an outrageous number, I would ask: what do you think of one quadrillion as a number tracking the amount of outstanding financial derivative instruments in existence or one trillion dollars being the annual deficit of the world's current largest single country economy (i.e. USA). As last week's policy announcement from the Bank of Japan proved, there is no limit to the insanity induced by drinking the collective Kool Aid.

And oh, the hated Gold stocks. Using the XAU Mining Index as a proxy for the senior Gold miners, we can see that 30 years of price history tells us when to get excited about the Gold stocks and that time is now. Instead of greed, there is only fear, loathing and/or disinterest:

This is a juicy set up for a trade, if nothing more. I think it will be much, much more. Much as in the last cycle (i.e. 2003-2008), it may well be another commodity price spike that derails the current "Goldilocks" scenario. I think Gold and silver are set to lead such a spike as business conditions continue to deteriorate globally. Meanwhile, the futures COT (commitment of traders) report indicates unusually skewed bearishness for all but the commercial traders (large banks like JP Morgan), who are now as bullish on silver as they ever seem to get (chart below stolen from Software North):

This is a potentially explosive situation that strongly favors a resolution in the PM bulls' favor. I don't think there has been a reading of greater than 45% bullish for the commercial traders in the past 10 years, and they are now at 43%. The momentum-chasing hedge funds are piling on the shorts here right as we hit trading range support. With an expanding open interest (rather than the usual decline into a low), an explosive short covering rally could occur with the slightest hint of a bottom (such as, say, with the action to end last week?).

If you would like some help in trying to trade the precious metals and PM stocks, I offer a low-cost subscription service (one month trial is only $15). If not, keep your physical metal safe and outside the banking system until the Dow to Gold ratio hits 2 (and we may well go below 1 this cycle). In other words, don't get Cyprus'd!

Adam Brochert
abrochert@yahoo.com
http://goldversuspaper.blogspot.com

BIO: Markets and cycles are my new hobby. I've seen the writing on the wall for the U.S. and the global economy and I am seeking financial salvation for myself (and anyone else who cares to listen) while Rome burns around us.

© 2013 Copyright Adam Brochert - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife