Best of the Week
Most Popular
1.SNP Offers Labour Deadly Death Embrace Alliance, Holding England to Ransom, Destroy UK From Within - Nadeem_Walayat
2.Gold And Silver – Most Widely Used Currency In Western World? Stupidity - Michael_Noonan
3.Election Forecast 2015 - Coalition Economic Recovery vs Labour Collapse - Nadeem_Walayat
4.Election Forecast 2015 - Debates Boost Labour Into Opinion Polls Seats Lead - Nadeem_Walayat
5.Why are Interest Rates So Low? Ben Bernanke, Confused as Ever, Starts His Own Blog to Prove It - Mike_Shedlock
6.Leaders Debate Election 2015 - Natalie Bennett Green Party Convincing Anti-Austerity More Debt Argument - Nadeem_Walayat
7.Labour Economic Collapse vs Coalition Recovery - UK Election Forecast 2015 - Video - Nadeem_Walayat
8.China’s Stock Market Mania; How High can Red-chips Fly? - Gary_Dorsch
9.Gold and Misery, Strange Bedfellows - 31st Mar 15 - Dan_Norcini
10.Ed Miliband Debate Election 2015 Analysis - Labour Spending, Debt and Economic Collapse - Nadeem_Walayat
Last 5 days
Stocks Bull Market Looks to Resume - 25th Apr 15
Gold And Silver - The U.S. Is A Corporation. Precious Metals Stand In The Way - 25th Apr 15
When the Nuclear Money Option Fails - 25th Apr 15
The War on Cash Special Report - 25th Apr 15
China Economic Slowdown Story - Why “Didi Dache” Is a Phrase You Need to Know - 25th Apr 15
The Trans-Pacific Partnership and the Death of the Republic - 25th Apr 15
Stock Splitting Caused the Stock Market Crash - 25th Apr 15
China Stock Market Parabolic Mania’s Global Risk - 24th Apr 15
What Will Happen to You When the U.S. Dollar Collapses? - 24th Apr 15
Why 2 of U.S. Dollar's Recent Bottoms Have 1 Thing In Common - 24th Apr 15
UK Economy Debt Timebomb Will Explode After Election - 24th Apr 15
Are Gold Stocks the Cheapest Ever? - 24th Apr 15
God, the Stock Market and Pascal's Wager - 24th Apr 15
Greedy Insurers Are in for a Nasty Surprise – Positioning You for Big Profits - 24th Apr 15
Four Things Missing From Obama’s First-Ever Energy Review - 24th Apr 15
How to Grow a Regenerative Medicine Industry - 23rd Apr 15
Stocks and Bonds Seven Year of Negative Returns; Fraudulent Promises - 23rd Apr 15
The Existential Danger To The Euro Is Elections - 23rd Apr 15
Stock Market No Clear Direction As Investors React To Quarterly Earnings Releases - 23rd Apr 15
Is China The Next United States? - 23rd Apr 15
U.S. Oil Glut: How High Can It Go? - 23rd Apr 15
Distorted Financial System Expect Deflation, Inflation And Hyperinflation - 23rd Apr 15
What McDonald’s Corporate Earnings Report Is Really Telling You - 23rd Apr 15
Gold Price Forecast to Become Priceless - 23rd Apr 15
FDIC Plots a Bank Heist Involving YOUR Accounts - 23rd Apr 15
$GOLD Price Year 2007 Again - 23rd Apr 15
Stocks Bubble - The Spread between Stock Prices and GDP is Blowing Out - 23rd Apr 15
Ukraine War - When Did We All Become Murderers? - 23rd Apr 15
Libya Crisis - EU Leaders Are Indicted for Nazi-Style Crimes against Humanity - 22nd Apr 15
Why Alternative Energy Isn’t Taking It on the Chin Despite Low Oil Prices - 22nd Apr 15
Bill Gross - German 10-Year Bunds Short of a Life Time - 22nd Apr 15
How to Profit from the Drop in the Oil Price - 22nd Apr 15
The U.S. Dollar's Move Is More Dangerous than You Think - 22nd Apr 15
Apple Watch Means Apple Will Become Worlds First $1 Trillion Stock - 22nd Apr 15
Half a Stocks Bubble Off Dead Center - 22nd Apr 15
They Said Go to College - Learning to become Debt Slaves - 22nd Apr 15
Best Cash ISA 2015/16, Instant and Fixed Savings Interest Rates, New Flexible Withdrawal / Deposit Rule - 22nd Apr 15
Unsound Banking: Why Most of the World's Banks Are Headed for Collapse - 21st Apr 15
Bitcoin Recent Low Price Volatility Might Be Deceptive - 21st Apr 15
Currency Wars Back As Russia Buys Gold - One Million Ounces in March Alone - 21st Apr 15
The Greece 'Grexit' Issue and the Problem of Free Trade - 21st Apr 15
Why Europe Lets People Drown - 21st Apr 15
Wealth Destruction for the 99.9 Percent - 21st Apr 15
SNP Publish England's Suicide Note as Pollsters Still Forecast Labour-SNP Election Disaster - 21st Apr 15
Characteristics of Extremely Over-Indebted Economies - 21st Apr 15
Trader Education Week -- a Free Event to Help You Learn to Spot Trading Opportunities - 21st Apr 15
Gold & Silver Alert: Silver Stocks’ Signal - 20th Apr 15
Now is the Time to Buy Resource Stocks, Especially Gold Equities - 20th Apr 15
DJ Transportation & Utility Averages Suggest Stocks Bull Market Is Over - 20th Apr 15
Crude Oil Price Bull Market Hope - 20th Apr 15
Stock Market Bears Get Slaughtered Despite Greece Counting Down to Grexit Financial Armageddon - 20th Apr 15
The Rise of the Paper Machines - 20th Apr 15
Gold and Silver Inflection Point - 20th Apr 15
SP500: A Butcher's Stock Market (Chop Chop Chop) - 20th Apr 15
Are Stock Market Bears Slowly Gaining Control? - 20th Apr 15
Sugar Commodity Price Bear Rally - 19th Apr 15
Avoid the Spread of the Stock Market "China Syndrome" - 19th Apr 15
Stock Market Going Nowhere Fast - 19th Apr 15
An Easy Way to Profit From the Two Biggest Trends in the Stock Market - 19th Apr 15
No Scripture Is Divine, Authentic and Beyond the Creation of the Human Brain - 19th Apr 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

US Historic Bubble

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.


© 2005-2015 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

Free Report - Financial Markets 2014