Why invest in Gold and Silver(Not Platinum/Palladium)

PM1 – WHY INVEST IN GOLD & SILVER? (NOT PLATINUM/PALLADIUM!)

Gold has been sought after as a store of value for more than 5000 years, through wars, depressions and recessions.  Silver a.k.a. poor man’s Gold, it is far more volatile.  Volatility means that when Gold goes up 10%, Silver goes up 20%-40%, but when Gold goes down 10%, Silver goes down 20%-40%.  Throughout this document, I will refer to Gold, but what holds for one, mostly holds for the other.  Platinum and Palladium (P&P) are far more contentious/complicated, because at least 50% of P&P is used in the automotive industry and a far lower percentage is used in coins, bars and jewellery.  However, in the next two decades, the demand for P&P is likely to fall by as much as 50%, as most cars will become electric. If you want to grasp this P&P aspect better, read my Futurism2 article “Just how disruptive will Technological Change be” at https://eelcogold.com/.

The demand/supply dynamics for Gold are very different from Silver. Almost all the Gold ever mined is still above ground, as more than 80% of it is stored in bank vaults or in jewellery, which means there is a nearly unlimited supply provided the price is right.  On the contrary, most Silver is used up in various industrial applications and less than 40% of silver is stored in bank vaults and jewellery.  This means that Silver supply shortfalls could arise if new sources are not found continuously, which could bias Silver to the upside.  Regardless, when the price of Gold rises materially, the demand for Silver bullion escalates rapidly.

The price/popularity of Gold broadly fluctuates inversely with equity markets.  i.e. Typically, when markets are rising, Gold goes down because “Gold does not pay dividends or interest”.  Contrarily, when markets correct significantly, there is often a flight to the safety of Gold, which pushes the price up.  However, these are mostly insignificant short term 1-2-year market corrections and Gold price up-runs.  The Big Question?  When and why does Gold have a huge “generational” bull market run?  This only happens during periods of Negative Real Rates and Negative Real Returns (NRR), i.e. When interest rates and stock market returns are less than inflation, which happens when “Real” interest rates/investor returns are negative.  During the 1970-80 Generational Gold Bull Market, it happened because inflation was rising very rapidly, and interest rates were playing “catch up” (see the period leading into the peak on chart below).  Contrarily, the current Generational Gold Bull Market started when stock markets fell in 2000 and interest rates declined until they became extremely low – i.e. Less than inflation.  Look how US 10-year yields fell for 35 years from 1981 into global “historic” lows towards the end of 2016 as shown below.  NB! They went negative in the EU and Japan.

Gold is currently in a really huge “generational” bull market run that started in 2001 and should end with Gold around $8 000 to $10 000 about 2025.  It is worth noting that Gold has offered far better returns than both the equity and bond markets during the period from 2000 to 2018.  The dynamic of the moves in the price of Gold so far, can be explained as follows:

  1. 2001 – 2011: Flight to the safety of Gold due to stock market crashes and NRR.  The 2000/2003 tech crash, interest rates falling globally, a moderate stock market rally, and then the 2007–2009 sub-prime crash followed by QE with further declines in rates to historic lows – negative rates in most of EU and Japan;
  2. 2011 – 2015: NRR as interest rates continued to decline, but Gold was not attractive since Global Equities offered better returns than Gold, which was good for Gold, because Gold was overbought and needed to correct.  The uncertainty following the 2009 crash faded by 2011 as Equities had recovered enough and continued to rise rapidly, so they offered better returns than Gold.  Gold corrected into Dec 2015;
  3. 2016 – present: Flight to the safety of Gold because investors anticipate a big correction/crash and NRR in 2018 or 2019, as this stock market recovery is now the longest on record and overvalued on almost every metric.  In addition, we have the first signs of inflation, which are being fuelled by Trump’s trade wars.  When stock markets crash, there is always a flight to the safety of Bonds, which will drive interest rates down again – and so we will be back into NRR territory.  This recession could be long as the attendant consumption collapse is likely to be huge due to record levels of Government, Corporate and Private debt.  To understand this statement, one must understand the Debt is future consumption brought forward and that this starts to unwind as interest rates/inflation rise.  See my Econ3 article and other economic articles that explain these concepts at https://eelcogold.com/;
  4. Near future: Following the multi-decade period of falling rates, which should end after the pending stock market correction/crash in the next 2-3 years (2020?), we are likely to see an extended period of rising inflation and trailing interest rates, like that of the 1970’s, both of which would be good for Gold.

 

CONCLUSION

For centuries, Gold has been a store of value and historically it was always included in every investment portfolio as a hedge against uncertainty.  We are now again facing such a time of uncertainty, where every portfolio should have 10%-25% in Gold or Gold shares.  Gold Shares are less attractive in South Africa due to threats of nationalisation, etc.

From the point of view of Technical Analysis of the charts, the point at which one should buy Gold is when it again rises above $1375 – $1400 (true as at Mid-September 2018).


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Disclaimer!  The content of this report represents the opinions of Mr Lodewijks, who is a retired Civil Engineer with diverse interests.  Where applicable, the content should be deemed informative guidance to get the reader thinking and not specific advice.

Mr Lodewijks is not a qualified Investment Advisor.  His investment reports aim to educate and help investors understand investment considerations and strategies.  As trading and investing in any financial markets may involve serious risk of loss, Mr. Lodewijks recommends that you consult a qualified investment advisor.

Resumption of the current generational gold bull market

PM2 – Resumption of the current generational gold bull market

Logic flow broadly from oldest (PM1) to most recent

Before we go further, we have to question this word “Resumption” as it implies the 2011 peak was not the final peak of this gold bull market.  First, one needs to know that true bull markets usually end in an “irrational” exponential peak and the best way to evaluate if the action was irrational is by way of Year on Year price change.  If one looks at the chart below from a great article by Steve Saville, posted in Jan 2014, we see that the peak in 2011 on the right, in no way resembled the peak in 1980 on the left, which implies that this Generational Gold Bull Market has not yet peaked.

Furthermore, the use of the word “Resumption” pre-supposes that the bottom is in and I will try to substantiate this, by way of fractal analysis and charts. In January 2016, Gold broke out to the upside of a 4 year correction pattern – see weekly chart below.  This breakout almost certainly signals the resumption of this “once in a lifetime” Generational Gold Bull Market with the attendant questions “How high will it go” and “When will it peak”?  While there are never any guarantees when one is trying to predict market direction, there are patterns that repeat and/or reliably play out with high probability – i.e. there are “pretty safe” bets.  However, I do want to caution you that there are many stages that have to play out before stellar Gold price action manifests.  Bottom line, in my opinion this is a good time to buy Gold or Gold Equities and “hold on” for an exciting, sometimes bumpy ride to the top in 6-8 years.

First, let us direct our attention to fractal analysis.  NOTE! A Fractal is a pattern that repeats.  However, while Fractal patterns repeat, as they are usually fairly similar in “shape”, the price targets and time frames would not be exact – see graphs below.

To confirm that the bottom is in using “chart” fractals, I post a similar stage in both the historic and current charts.  Below left you see the correction of the weekly Gold Bull Market from end ‘74 to mid ’76.  Look at price, bound by the red parallel lines, then the drop, the declining pennant formation, the break down below that pennant and the sudden rise through the tip.  After that quick rise the Gold price commenced rising 8 fold from $105 in mid 1976 to eventually get up to $850 by end 1980.  Are we at a similar comparative low point in the current weekly chart of the correction from 2011 to 2015, where price also broke down and then up out of the declining pennant?  The subsequent rising bottoms certainly seem to imply that the bottom is in.  The retest above the blue resistance is confirmation that Gold is on the brink of a major breakout to the upside.

However, Gold must first break above the horizontal red resistance line shown below, which sits at about $1360 to $1 370, before it rises to the next major blue resistance levels at about $1 800 and $1 920.  The $1 370 breach should happen in September 2019 and, if that happens, the $1800 target could be reached by September 2020.

Next, we want to look at “How high” and “When”.  In the table below I try to do a pro–rata comparison using the time and price targets of the 1970 – 1980 Gold Bull Market, to predict the future action in the current Gold Bull Market.  During the 1970-1980 Gold Bull Market, Gold rose from $35 to $195 by end 1974 and then dropped just below the 50% Fibonacci retracement in mid-1976, before again commencing its rise.  The initial rise took Gold back to the previous peak at $195 by end 1977.  Next followed a consolidation phase lasting 9 months, comprising a bonk against the previous peak at $195, a dip, a bounce through $195, a retest of $195 and only then the final exponential rise up to $850 in just 1.2 years.  Using this Fractal Pattern, I create a matching “pro rata” scenario for the current Gold Bull Market (NB! It seems to be about +/- 10x higher).

The Nov/Dec 2015 bottom at $1046 was the sub 50% Fib retracement bottom of the rise into Sept 2011 (the correct pro-rata value would have been the table’s $931).  Looking at the projections in this table, the 2015.7 bottom was a tad later at about 2019.9 and the 2019.7 target of $1 920 will almost certainly be reached later – possibly in 2020.9.  Regardless, this time around we need to remember that economic circumstances are far worse than they were in 1980.  Debt is at unsustainable levels; deficit spending continues unabated; interest rates are below inflation or negative; low interest rates have caused mispricing of assets; key economic indicators are manipulated (eg. inflation); the global economy is in a mess; things are very tricky geo politically, etc.  Furthermore, due to the “Fiat” money shenanigans comprising QE, TARP and ZIRP, a significantly higher peak, with Gold over $10 000, is a distinct possibility.  I know this sounds far-fetched, but no more radical than $850 in 1980 and remember, it is not Gold that is going up, it is the currencies and confidence in the system that are going down.

Even if the above is true, we still have a way to go (below).  During the 1980 bull, Gold rose progressively back to $195 (dotted red line on the left) early 1978, was repelled at 1, broke through at 2, retested at 3 before commencing its parabolic rise to $850 early 1980.  The depicted formation (left) is known as a cup and handle, which is a very reliable break-out pattern, with the cup shown from 1974 to 1978.

If we relate the above cup formation to the current Gold Bull Market, we have a way to go.  We need to first break through the $1 370 and $1 800 resistance levels, before we get back to our 2011 peak at $1920.  There would be some consolidation action around this level, which would last a year or two, before the final rise to the ultimate peak.

How realistic is a target of $10 000 if the DOW and S&P collapse?  Looking at the DOW:GOLD ratio below, from an excellent article by Gold-Switzerland mid last year, we get a clue.  Note! The current ratio is 20.7 as at April 2019, which is close to centre line resistance.  The ratio seems to be rolling over and could be heading down soon.

Remember, these are high probability plays, not guarantees.  If the DOW Gold ratio goes back down to say 1:1, will that be with the DOW at $10 000 and Gold at $10 000 or with the DOW at $3 000 and Gold at $3 000.  Worse still, if the ratio goes down to say 0.5:1.0 as implied on the left will that be with the DOW at $5 000 and Gold at $10 000.  While we play these games and convince ourselves that the future looks very promising, only time will tell.

Please remember that if Gold does go up by a multiple of say 6.7 ($1300 to $8800), Silver will go up considerably more.  Historically the Gold Silver ratio was set at $16:1 by Sir Isaac Newton, as it reflected the ratio of Gold vs Silver in Earth’s crust and which ratio was again reached with Gold at $850 and Silver at $50 in 1980.  If this ratio prevails again, with Gold at $10 000, Silver could be over $500, or if Gold gets to $8 000, Silver should get to $400.  This provides a huge multiple from the current Silver price of $15.00.

CONCLUSION

It seems clear that the bottom is in and that Gold has broken up.  The only question is how high will it go $5 000, $8 000 or $10 000.  My money says the latter is conservative.


Disclaimer!  The content of this report represents the opinions of Mr Lodewijks, who is a retired Civil Engineer with diverse interests.  Where applicable, the content should be deemed informative guidance to get the reader thinking and not specific advice.

Mr Lodewijks is not a qualified Investment Advisor.  His investment reports aim to educate and help investors understand investment considerations and strategies.  As trading and investing in any financial markets may involve serious risk of loss, Mr. Lodewijks recommends that you consult with a qualified investment advisor.

When “does” gold rise and when “will” gold rise again.

PM3 – When “does” gold rise and when “will” gold rise again.

Logic flow broadly from oldest (PM1) to most recent

THE ONLY TIME GOLD RISES IN A SUSTAINED GENERATIONAL BULL MARKET: 

Gold only “really” rises “materially” when the “after tax” returns of both the bond and equity markets are, or are expected to be, less than inflation for a considerable time.  Such periods of “Negative Real Returns” (NRR) give rise to generational bull markets, which only happen when the following two conditions are met simultaneously:

  1. Equities are not offering positive “Real” returns, which typically happens during major stock market crashes and/or significant / protracted corrections.  During such crashes or corrections, there is usually a flight to the safety of bonds and gold.  However, more recently, bond yields have been extremely and artificially low, which made Gold attractive – more about this later;
  2. Interest rates are not offering positive “Real” returns, because either:
  • Interest rates are nominally negative as they currently are in the EU and Japan, or negative nett of inflation and tax, as we currently see in the USA and UK; or
  • Inflation is rising rapidly, and lagging interest rates are playing catch up, as we saw during the 1970-1980 Gold boom.

Therefore, we only need to determine when these two conditions will be met if we wish to invest in Gold. NB! Any spikes in the price of Gold arising from sporadic events such as political conflict, acts of terror, trade wars or regional wars, tend to be short lived.

Gold’s action these past 18 yrs interpreted from the above “NRR” rates perspective

Due to continued deficit spending and consequent rising sovereign debt levels, Governments had a vested interest in keeping rates artificially low, to suppress debt service costs.  Below we see the 36-year decline in 10-year UST rates below the declining red resistance line, which bottomed in Jan 2016, followed by a pop up over that line.  Technical Analysis suggests that yields should soon drop to retest the red line, near or below record lows, before resuming a cyclical upside breakout.  However, one is betting against the Fed and other central banks, so it is difficult to anticipate just how long they will continue to manipulate interest rates to the downside.  Such a drop would typically occur in the event equity markets crash, which could be in the trusted Sept/Oct 2019 or Sept/Oct 2020 periods, or any time in between.  Regardless of the reason, the longer rates remain super low, at or below inflation, the better it is for Gold.

However, the above “monthly” chart’s Stochastic suggests that rates are oversold and could rise for many months before they fall, which may favour the later 2020 equtiy market correction.

It is critically important to realise that “super/artificially” low and negative yields discouraged savings and encouraged risky speculation.  This resulted in rising debt, which is future consumption brought forward, and the mispricing of most assets.

Gold’s action these past 18 years interpreted from the above “NRR” Equity perspective

Referring to the chart below, I use the monthly S&P 500 as proxy for global markets, because if the US sneezes, the world gets the flu.  Equities crashed early 2001/2003 and again in 2007/2009, all the while holding below the 2000 peak, depicted by the horizontal red line, until 2013.  During most of this time, Gold was rising because equities did not offer actual, or the prospect of, positive real returns, especially after adjusting for inflation and tax.  However, by September 2011, investors shifted out of Gold, and back into equities, because they became convinced that equities would once again rise above the red line.  The vertical black line on the left reflects where the Gold boom ended Sept 2011, where-after, Gold corrected because equities offered superior returns.  Gold then bottomed in January 2016, at the vertical black line on the right, as investors started hedging their bets in response to the prospect of rising inflation with trailing rising rates and numerous other reasons outlined below.

Current and future prospects for Equities and Rates

From a technical analysis perspective, the S&P remains above the rising red support line, which suggests further upside, while the blue Fibonacci lines show that the S&P has not made a 38.2% correction of this entire bull market.  However, this boom is now one of the longest on record and markets are overbought, so we are overdue for a correction.  Furthermore, MACD is bearishly aligned and we also see a probable bearish divergence between the price and the Stochastic oscillator, as reflected by the two short red lines.  The weekly charts (not shown), show overbought markets rolling over, which suggests the above monthly divergence will be confirmed.  Therefore, it is possible that the S&P is forming a bearish triple header.  Contrarily, if the S&P rises to a new record, at say 3 000 (up 1-2%), it could complete a bearish megaphone top.

It should be noted that in the past, interest rates were the market’s “risk pricing mechanism”, with higher rates suggesting higher risk and lower interest rates suggesting lower risk.  Accordingly, investment funds used to move between equity markets (risk on) and bond markets (risk off), which meant that Stocks and Bonds were not correlated.  However, in this era where interest rates are no longer set by “free” markets, but are instead kept artificially low by central banks, that risk pricing mechanism is broken.  These ever-lower rates made both equity and bond markets attractive, consequently, those two markets have become increasingly correlated these past 10 years.  This is not a good situation, because it suggests that the next “risk off” cycle could be very painful, because the traditional flight to safety offered by Bond markets will no longer be quite as attractive.  This is exactly when Gold comes into its own as the ultimate “flight to safety” destination.

To make matters worse, recessions typically eliminate the excesses that build up during booms.  However, central bank intervention has repeatedly prevented this from happening, by indulging in untested monetary policies, such as QE, TARP, ZIRP, etc.   Today, 40% of Eurozone bonds and 16% of corporate bonds have negative yields.  The fact that deficit spending continues unabated and sovereign debt continues to spiral out of control, suggests that QE to infinity is the only logical future outcome.  This would initially be accompanied by the renewed repression of rates, but could in future feed inflation, both of which would be great for Gold.

The resulting artificially low and negative bond yields have resulted in significant market distortions as cheap money lowers the threshold for investments that would otherwise not be considered. Amongst others, this has pushed pension funds and investment companies into a search for yields, which translates into more risky strategies and greater pain in the event of a market crash.  Consequently, the excesses and distortions continue to grow unabated, which suggests that the next market crash will, in fact, be an unusually big economic reset.

However, as mentioned above, super low rates have encouraged risky investments, which, in turn, resulted in mispricing of assets.  Consequently, one of the strongest bull markets in history has not been matched by the traditional “strong” 4%-6% GDP growth, but has instead been accompanied by a very weak economic recovery.  For example, it is estimated that 15% of companies in the S&P are losing money after interest, despite rates being so low.  In fact, much of this seemingly “impressive boom” was driven by speculative growth expectations, not value.  This is because the latter part of this equity boom was mostly on the back of a handful of tech stocks, share buybacks and, more recently, IPO’s of loss-making tech companies whose shares soar despite continued losses.

It should also be noted that GDP is a measure of growth in turnover and, in our emerging multi-tech world where things are increasing cheaper or free, current economic measures are no longer accurate depicters of economic performance.  Furthermore, many of the economic statistics, like inflation, are manipulated by Governments to reflect more favourable outcomes.  Accordingly, both Government and Business are increasingly operating in the dark without an accurate compass.

Add to all this the fact that countless disruptive technologies are going to change the way we do business and the way our world works in the next 5-10 years.  This will cause many mega corporations and even industries to be transformed, shrink or fail.

Fundamentally, all this lays the foundation for a long awaited 38.2% – 50.0% Fibonacci correction / crash.  When that happens, there will be a flight to the safety of bonds, which will drive rates down.  It is my expectation that it will start in Oct 2019 or 2020.

Of course, if an equity collapse causes US interest rates to fall, the Dollar would lose its appeal, and significant Dollar weakness would probably herald the onset of inflation, which would, in turn be good for Gold.

Why invest in Gold (and Silver) – provided we get the timing right

The above analysis suggests that we will soon see a correction in Equities, and we will soon see rates dropping below inflation once again, thereby meeting the two criteria needed for Gold to resume its role as the ultimate “flight to safety” destination.

Remember, the entire point of buying “physical” Gold or Silver is to:

  1. Own a tangible to ensure the return “of” your capital when the return “on” your capital is at risk and is likely to be considerably negative in the near NRR future;
  2. Get away from owning FIAT currencies, which continually lose value;
  3. Get out of the dishonest “screw you” banking system; and
  4. Eliminate third party risk at a time when incentive bonuses have created a situation where management strategies and equity valuations are no longer rational.

Instructive article: https://www.milesfranklin.com/what-would-you-sell-your-gold-for/

Gold always hold its value, or better, during times of economic crisis.  Furthermore, Gold is the perfect currency hedge in an era where all currencies are fiat and gravitating to zero.  Finally, Gold has outperformed all asset classes over the past 100, 50 and 20 years. Before he became Chairman of the Fed, Alan Greenspan said:

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. Deficit spending is simply a scheme for the hidden confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard”.  He recently confirmed that he stood by every word of that.

Late (2016), Greenspan likened the Fed’s over-blown balance sheet to “a tinder box that has not been lit“, characterized the job of Fed chairman as one “subject to the heavy dictate of the federal government”, and recommended gold ownership as a hedge for private investors. “Gold,” he said, “is a good place to put money these days given its value as a currency outside of the policies conducted by governments“.

Gold’s action and prospects – a future scenario

Before Gold can truly resume the generational bull market that started in 2001, we need NRR’s in both Equities and Bonds.  This would probably only happen if Equities were to crash at the end of their current record run, which would, in turn, drive yields back down to, or below, their historic record lows as there would be a flight to the safety of bonds.  Therefore, all we need to do is to anticipate, or wait for the day, when Equity markets correct meaningfully, as that will provide the trigger for both lower bond yields and higher gold prices.  This suggests that analysing the Gold price charts is almost pointless until this happens.

Gold is still not out of the woods and the charts are not bullish.  Fundamentally, Gold must first break above the horizontal red resistance line shown on the monthly chart below, which sits at about $1 370, before it rises to the next major blue resistance levels at about $1 800 and $1 920.  Bearing in mind that this is a monthly chart, the $1 370 breach could happen in September 2019, or it may only happen in 2020.

A subsequent break above $1920 would be conclusive confirmation that the Generational Gold Bull market is on track for stellar performance.  The PM2 fractal analysis I updated in 2019 sheds more light on this.

When Gold breaks above $1920, it is my contention that Gold will reach $8 000 to $10 000 by about 2025/2027, which would be 6.0x – 7.5x higher than the current price of $1 300.  Contrarily, Silver is likely to go to R300, $400 or even $500, which would be 20x to 33x higher than the current price of0 $15.00.

THIS COMMENTARY WITH CHARTS, by Jesse Felder underscores the above.

One chart I’ve been watching for the past few years is the ratio of Gold to the S&P 500. Over the last half-century there have been good times to own gold and good times to own stocks and the two have rarely coincided (making gold a better portfolio diversifier than many alternatives). The trend in the ratio of the two (at the bottom of the chart below) has been a decent guide to understanding when to own each.

The ratio very recently crossed above its 10-month moving average thus giving another buy signal which would suggest market trends are supportive of owning gold versus owning stocks. Overcoming its most recent high set late last year would likely confirm this latest signal is more than just a “whipsaw.” And it would have important long-term implications for investors of all sorts as these trends have typically lasted a decade or longer.

Last notes

Without Gold and Silver, there is little diversification in your policy.  Diversification within equities is not diversification if the markets crash, as all equities crash together.  Today, diversification into bonds is not as clever as it was in the past, especially if there is a risk of rising rates.   NB! I consider Platinum and Palladium risky in the long term as 50% of PGM are used in cars with internal combustion engines, most of which are likely to be replaced by electric cars in the next decade.


Disclaimer!  The content of this report represents the opinions of Mr Lodewijks, who is a retired Civil Engineer with diverse interests.  Where applicable, the content should be deemed informative guidance to get the reader thinking and not specific advice.

Mr Lodewijks is not a qualified Investment Advisor.  His investment reports aim to educate and help investors understand investment considerations and strategies.  As trading and investing in any financial markets may involve serious risk of loss, Mr. Lodewijks recommends that you consult with a qualified investment advisor.

Eelco Lodewijks

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