The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, January 21st, 2014.
Sun is shinin' in the sky
There ain't a cloud in sight
It's stopped rainin' everybody's in a play
And don't you know
It's a beautiful new day hey, hey
Runnin' down the avenue
See how the sun shines brightly in the city
On the streets where once was pity
Mister blue sky is living here today hey, hey
Mister blue sky please tell us why
You had to hide away for so long
Where did we go wrong?
For gold investors, the sentiments expressed in Jeff Lynn's immortal song Mr. Blue Sky (lyrics above) seem all to appropriate right now considering the slamming you have taken over the past two-years - where did we go wrong - where did we go wrong indeed? Because it seems like an eternity since precious metals investors have seen even the dreariest shades of blue in the sky. Gold was down 28-percent last year, with silver worse at 30-percent. But the real pain was felt in the stocks, with the GDX down more than 50-percent, and juniors down some 90-percent in many cases. 2013 was a bloodbath for precious metals investors, never mind just a rainy day.
But what would you say if I told a pause like this was all part of the plan, perfectly natural (fluctuation, vibration, and retracements are natural), and that blue skies were coming back for gold and silver again soon. Would you believe me?
If not you should, because from both mathematical and behavioral viewpoints odds favor renewed bright skies for the monetary metals once again, not to mention the fundamentals. Of course I am not the only one cheering gold on right now because of its fundamentals. There are many out there who are always bullish (we won't mention who they are) for one reason or another. Now however, and where we differ from these types in approach, we have a convergence of technical factors colliding that will bring gold's bullish fundamentals back into a proper light so that its 'blue sky potential' (significant upside potential) can be seen by all in the full measure of time.
This is why I will turn bullish very soon, because the comprehensive and in tune approach to investing in the precious metals market is telling us to do so.
At center of what one should be watching in order to shape opinion and strategy in the precious metals sector is the Dow / Gold Ratio (DGR), the most important indicator that measures macro-conditions - or at least perceptions of the macro - and the need for acceleration / deceleration of the debasement of fiat currencies within the Globalization framework. In this way then, and with gold still effectively the defacto anchor measuring the health of the global economy, the grip officials have on commerce if you will (confidence in government), again, the DGR remains the most important measure in this regard, meaning when gold is rising, investors are exhibiting decreased confidence in government and their ability to keep things moving forward. (i.e. because of the potential for uncontrolled [money] currency debasement.)
Knowing this then, and knowing these things move in varying degree cycles, the next thing to look at in order to measure 'where we are' in the 'big picture' is to study a long-term chart of the DGR, one that shows us how it performed in the last affair of the same degree. There are several good ultra-long-term (100-years) DGR charts we could use for this exercise, but this one has been selected because of its clarity and simplicity, as well as the fact it's interactive, allowing one to check dates and levels closely when / if desired. This is also why have purposefully provided the attached link, not displaying the chart itself on this page. To the chart now, and the important message it provides, one should note two observations. First, it should be overtly evident to the observer that the since the turn into the 20th century, which we will call 'accelerated industrial times', matching the take-off of hydrocarbons in human economy, and creating increased volatility of sweeping dimension, there have been three larger degree cycles, the third of which we are presently experiencing.
Next, and in using the last completed cycle in the DGR from up to down as a guide in these increasingly volatile times then (because hydrocarbon man has stretched the world's resources too thin and is now in decline), occurring between March of 1966 and February of 1980, in order to understand where are in the present cycle, which began in June of 1999, it should be noted that between October of 1974 and August of 1976, an almost 2-year (2-months shy of 2-years) mid-cycle correction occurred, much like what is happening today, with the present counter-trend reaction now stretching past 2-years by almost 6-months. This extension is understandable however, because not only are we in a higher degree cycle in terms of price, time, and lifecycle, likely measuring the terminal stages of hydrocarbon man, Globalization, and hyper-inflated asset measures; but also, the entire sequence between 1966 and 1980 was more compressed than the present one, likely for the same reason(s).
Knowing all this then, the question does arise, being well past two years in the current cyclical correction higher in the DGR, just how long should the present cyclical correction higher last before returning to secular (long-term trend) decline? Having discussed this topic at length many times over the past year, if one has been reading these pages you should already know the answer to this question, however we will review again because - drum roll - we are finally within sight of the return to secular trend lower. Therein, and again, as you may already know, for some time now (approximately one-year) we a have been prognosticating that based on the totality of technical conditions that has historically proven to be germane in forecasting such larger degree turns, the 233-month exponential moving average (EMA) has proven to be the significant 'trend definer' (not to be confused with the 155-EMA often defining volatility extremes in secular moves of less important markets) in such moves, especially in highly manipulated and important markets, markets that garner much attention.
Further to this, and now that the DGR is approaching the 233-month EMA at 14.5 from the underside, after plunging through in back in 2007 to set the secular trend, in terms of continuing to define the importance of this test, meaning it should be repelled off this level and return to secular decline fairly quickly once this key level is touched, it should also be noted that an important (Fibonacci) convergence exits at 14.5, that being it's not only the 233-EMA, but also the 23.6-percent retracement off 2011 lows when it was vexing 6. Add to this what looks to be the best Elliott count is also suggestive of a cyclical / counter-trend top after one more surge higher, again, likely vexing 14.5 (as pointed out previously), and it's safe to say we have a convergence of important technical evidence that suggests a meaningful turn is approaching, a turn that could take the DGR below unity before it's all over, scheduled to bottom in 2020 or thereabouts, a Fibonacci 21-years off the top counting the start of the secular decline in 1999. (See Figure 1)
Now some will argue that none of this matters anymore with HFT, ZIRP, and QE, and that the stock market (all markets) are rigged, nothing more than an elaborate video game if you will. But one should disregard such flippant appraisals and attitudes because I can assure you Mother Nature is alive and well in all of man's doings, and when those doings go too far from a healthy path something will happen to correct the situation. Of this I can assure you. What will it be this time, framing America as the 800-pound gorilla in the room, the decaying edifice of a lost empire now in terminal decline due to not just natural forces, but corruption and rot as well. For this I give you China's desire to overtake America as the world's supreme power, which is already the case in several key measures, but needs to trump the game with the currency card.
As you may remember we have had this discussion several times before, and not with standing China's own troubles in terms of popping debt bubbles, the it's important to understand that as the popping of the larger global debt bubble accelerates, which is the technical definition of deflation, the demand for gold to back the new currencies (after the great reset) will go through the roof; because although international trade will be curtailed considerably (as Globalization reverts to regionalism, and then localism, etc.), still, such trade will go on, with one big caveat. Nobody will trust anybody else once the collapse goes viral, which will extend from the plutocracy right down to individuals. Of course our focus for the purposes of this explanation is international trade, where exchange accounts will increasingly need to be settled in gold (at least partially), bringing back the need for a quasi-gold standard. (See Figure 2)
Now if you don't think that will benefit the gold price, deflation or not, you are just plain not thinking given the total value of international trade last year was a whopping $18 trillion, on global GDP of almost $70 trillion, and still growing. (i.e. until the larger debt bubble pops and we revert back into neo-feudalism essentially.) So, with the value of all the gold ever mined at a measly $6.5 trillion at present, and country's gold reserves far less (not to mention much of this gold has been leased out [sold] into the market long ago and fraudulently remains on the books), you can see where this is going when it finally hits the fan. Both rich and poor Chinese people know this as they see trouble coming at home and abroad and are acting to preserve their wealth, which will change the balance of global power for generations eventually. So you see, the demand for gold is increasing on a multi-dimensional basis and will literally explode higher at an approaching pivot point.
This is why gold can go higher than most people realize. And although it may not get to $50,000 like Jim Sinclair thinks, if the Dow remains above 10,000 throughout the coming debacle because the Fed begins monertizing $1trillion per month (instead of per year), and the DGR goes to unity (and it could go below 1) as it has in all previous secular lows throughout modern history, this alone puts gold at $10,000 - again - which is far higher than even optimistic gold bugs can see today. The present consensus has gold going to $3,000 plus and that's it. This would put the GDR at 3 and change with the Dow at 10,000, which would set a new precedent for a secular low, and for this reason is not probable. In fact, and conversely, the opposite is more probable considering the hate, disdain, and lack of respect Americans (Westerners) have for gold, the antithesis of the dollar($) as global reserve currency. (i.e. the chief export of the US is worthless $'s.)
Again, this cannot last for ever, and it is this dynamic, which we will characterize as 'pent up energy' to put things in proper context, that will propel gold, silver, and precious metals shares into a mania the likes of which the world has never witnessed as the decade turns - the likes of which the world has ever seen. Why? In one word - panic. Stupid people - the 'team players' that don't want to rock the 'status quo boat' - will panic into precious metals once they realize the American establishment is a fraud - and not more powerful than Mother Nature, honesty, and common sense. That's the problem with living in a dishonest money economy you see, after a while people forget about these things and need to be reminded, making the elimination of the business cycle by the world's central banks (planners), led by the Fed (Peak Fed), which is seeing its limits now as well. (See Figure 3)
All we need now to see an accelerated unraveling of the West's Anglo bank cartel based farce is for the stock market to begin heading lower (despite HFT, ZIRP, and QE), which will gain the masses attention as they see what's left of their savings vanish once again. And while it may take some time for the larger topping process to unfold, as was the case in the year 2000(comparable circumstances pictured above), what's important to realize is the risk of an accident, a 1929 (50%) style collapse in a compressed timeframe (3 months) of the broad market is possible here because of a combination of Wall Street games (fiction) gone wrong finally matching up with the reality (seen here, here, here and here). Because you can't starve the masses with QE that only benefits bankers and their buddies (think politician's and business leaders) by primarily jamming asset prices higher (which only benefits the top1 to10%), along with the cost of living (which hurts the bottom 90%), and not see collapse at some point.
Because this means the whole system is a lie, a crafted fabrication to benefit unprincipled wealthy charlatans and plunder a gullible poor, all in the name of maintaining the 'status quo' that an increasingly neurotic and insecure public ironically still cling to like a safety blanket. But not to worry if you are 'the' status quo - right? If the stock market starts going down, which would destroy what little of a rapidly decelerating wealth effect that still exists for the 'middle class' (almost an extinct animal these days) in no time (think peak margin debt, peak debt, etc.), we just add more QE, which would pump the bubbles up even bigger. What's more, we may not even wait for real trouble to show up and start QE in Europe. (i.e. using the threat of deflation as the excuse.) That will blow every bear's mind and squeeze stocks even higher - right? Of course this would not fix a thing in the larger economy; it would only make the rich richer and increasing numbers poorer as inflation takes off in the real world.
And this is exactly why we can have a crash in the stock market as well. Because this kind of intervention is unprecedented, as the 'powers that be' attempt to preserve their wealth before anything has even happened. In this sense, they are 'blowing their load' before any climax and are leaving little to no reserves for when they will be needed, when an accident (Mother Nature) takes stocks down anyway, and they have already used up any kind of support and surprise value such measures create accept the 'shear shock' as to just how far these maniacs will go in currency debasement measures. This is why stocks can go way down from here, because even with liquidity beginning to recede on its own, this is the second year of the Presidential Cycle, meaning traditionally this is the year the Fed is obliged to tighten monetary policy (in cooperation with their politician partners in Washington), so that things can be loosed back up coming into election time in 2016.
It's been this way for some time (since the 20's), where again, one should expect a tightening bias from the Fed into the later parts of this year, that being the second year in the Presidential Cycle. Of course with our fiat currency economy so hooked on constant and increasing stimulation we have already witnessed a Presidential Cycle inversion starting last year in August when things were supposed to begin slowing down. But the Fed supposedly started to taper it's QE program at the last FOMC meeting and will apparently do so again coming up later this month in an effort to 'save face' in this regard, which may be all that is required to pop the equity bubbles again, where one should expect at least a 15 to 20-percent correction in the broad measures of stocks, if the powers that be are able to hold things together, or perhaps something more dramatic if previous bubble dynamics come into play.
With all that said about the negative prospects for stocks, shouldn't this be good for precious metals? Doesn't that sound like a spicy recipe for gold and silver? Of course it does, but again, one must remember not to impugn this bullish view on precious metals shares right away - until the margin debt deleveraging is largely underway. Gold, and to a lesser extent initially, silver, should respond to crashing stocks positively almost immediately, but you will remember that it took 6-months in 2000 to find a bottom in the shares after the broads topped while speculators where deleveraging. (i.e. expunging margin debt) And while it's true a great deal of the excess is already expunged from the shares, we are dealing with record levels of margin debt and other bubble dynamics right now, not the least of which is sentiment, which is why the Fed needs to prick the bubble slightly itself, or face impossible circumstances later on.
Now some will argue (status quo thieves) that all this margin debt is no problem on an adjusted basis, however you should never trust liars (think bankers and brokers, especially those at high levels in big cities) when it comes to money matters, especially those who count on defrauding a gullible public to make their living. What's more, and in the more immediate future, we still have the issue of an unresolved count in the DGR that is suggestive gold still has one more wave higher (see count here), meaning stocks still have one more advance, and gold, a decline. You would of course never know this reading the blogosphere, or watching precious metals shares rising with enthusiasm in January Effect related buying. This is the big problem for these brave (but unthinking) souls, because although the message in the DGR count could be wrong, at the same time it will be interesting to see just where precious metals shares are at month's end.
Because the status quo does not want gold putting in a good monthly performance due to the positive message that would be triggered for credulous traders, where not only is a good performance in the first week of January considered a good omen for the entire year, more importantly, so is a good performance on the month as well. So again, it will be important to see if the bureaucracy's price managers can stuff precious metals shares, and the metals then, back into their respective boxes by month end, where now that they are short-term overbought, this will be easier. (i.e. did the banking cartel just set a trap for the unsuspecting?) While we won't know for sure for another two weeks, for those who bought in late December to take advantage of tax loss selling related weakness, one might be inclined to take profits here until we see if the fat lady is finally ready to sing as the month wears on.
That being said, and for those in it for the long-term, given the fundamentals, and the probability only one more wave lower is probable, some would be inclined to hold positions, and that is fine for those with such an orientation. Several things in this regard should be realized at this point however, with not just the understanding margin related selling is now likely an issue for precious metals shares too, because recent buying has been the result of 'hot money' sector rotation (from expensive to cheap); but also, if a similar pattern to the year 2000 experience is repeated, where present circumstances are very similar to this time, it should also be realized the shares could still be halved from present levels. So, if you intend to hold shares over the next 6 to 12 months, one should realize that liquidity conditions are good right now, but may not be if a 'panic' is witnessed at some point in 2014, raising the specter of indiscriminant leverage related selling.
Accumulating bullion is a different story of course, with far less downside possible. Therein, gold (and silver) should actually rise from the high in the DGR, which again has only one more push higher in coming weeks, possibly not even taking out existing lows in the process. Here, it should be realized that the shares are not a highly correlated proxy for bullion, being speculations in precious metals mining, not the ultimate form of saving and preserving wealth throughout the ages. And you should know this too, acting accordingly within portfolio planning decisions. Because while precious metals shares may be cheap, with gold trading below the cost of production, making them attractive to unwary speculators, it should always be remembered that they are not only highly manipulated (subject to faulty Western pricing mechanisms); but also, it should be remembered they are also subject to the same vulgarities as other stocks in panic conditions, which as the clock ticks on, is just about due.
After this however, this panic that should arrive at some point in the not too distant future, it will be blue skies for precious metals too, joining gold (and silver) which should see bottoms soon with a top in the DGR. And while 2014 might prove to be volatile on all accounts, if history is a good guide, next year, as well as the following five, should prove quite rewarding for precious metals - with blue sky potential in all accounts.
Mister blue sky please tell us why
You had to hide away for so long
Where did we go wrong?
Hey there mister blue
We're so pleased to be with you
Look around see what you do
Everybody smiles at you
Since first publishing this analysis on our site, the DGR has failed, truncating the corrective impulse higher discussed in detail above.