Jan 142016
 

Even though investors are constantly told in disclaimer boilerplate that “past performance is no guarantee of future performance” the siren call of historical price charts is hard to resist. In the case of gold and silver, it is impossible to avoid projecting the 1970s bull market on today’s price action due to its epic nature and perfect representation of Dr. Jean-Paul Rodrigue’s bubble behaviour.

Gold bulls would argue that economies and financial systems have not been healed and accordingly the gold price top in 2011 was only a mid-cycle peak similar to the peak of $197.50 in December 1974. In chart form this claim manifests as per below.

bubblecomp1

The claim looks strong based on the similar behaviour during the initial bull phase – excepting the area marked (1), which is OK as history is said to rhyme, not repeat – and the almost identical retracement in terms of size (50%) and relative duration.

The “relative” speaks to the weakness of this charting analogy as to fit the two time periods one has to “speed up” the 1970s – the recent gold market’s build up and retracement took about twice as long at the similar behaviour during the mid 1970s. Maybe the explanation for this is the greater degree of central bank market activities with QE etc to prevent financial market corrections (and corresponding gold market response).

Based on this chart projection, the current gold market is due for a new bull market as marked at (2) and while the 10:1 ratio will warm the hearts of gold holders with that giddy $9,000 scale on the right hand side of the chart, I would note that on this basis it will take around 5 years before gold reaches its previous $1,900 highs sometime in 2020.

Final point I would make is to emphasise the “rhyme, not repeat”. Note that the final price run involved two parabolic price phases, the first marked (4) at around $400 and then another to $850. My advice would be if you see a parabolic price move, sell – there is no guarantee that it will play out exactly the same this time and a 50% correction is reasonable on the other side of the bubble. The $4,000 in the hand could turn into $2,000 just to maybe get $8,000. While hopefully many are sagely nodding right now that they would be so happy with $4,000, the fact is at that time there will be many plausible arguments put forward that even higher prices are inevitable, just as there was when gold was running up to $1,900. But such is the stuff that bubble tops are made of.

Of course this would not be a trademark Bron balanced blog post without a dream-popping counter argument, as per the alternative chart contortion below.

bubblecomp2

Here we see a mid-bull cycle surge marked (1) but the financial crisis marked at (2) prevented a retracement and pushed gold on to its eventual high. On the downside we see a similar levitation/denial after the top before the price crashes and continues its depressing deflation.

Note that the timescales on this overlay are identical – a day in the 70s equals a day in the 00s, which is a factor in its favour. By this chart 2016 will continue to see gold fall down to circa $900 marked (3) before staging another run up over the next three years to around $1400 or thereabouts as marked at (4).

The logic behind this potential future is that while the financial system is hardly fixed and there will be risk events ahead that will drive money into gold, central banks have demonstrated a willingness to take action to prevent the sort of complete economic breakdown that would justify a $8,000 gold price.

Ultimately, which of these futures you subscribe to depends on whether you believe in the narrative that central banks are omnipotent. If you think they have fixed things and/or can hold it together, then sell the coming $1,400 blip. If you think it is still to unravel, then buy the $1,000 dip. Good luck either way.

Read this article in German at GoldSeiten.

  • franktrades

    Great charts, thanks.

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  • Motley Fool

    I have been wondering if the recent bottom could qualify as the end of the bear trap in the standard bubble chart, and we are now entering the phase of media attention.

  • majorx

    If Central Banks were omnipotent we wouldn’t have a catastrophic debt delimma which they should have wisely prevented if they were omnipotent. There is no way to pay off this debt without a global economic reset or recalibration. The only way to reset is with a recognized monetary standard which the World recognizes as gold. The massive reset required would have to reprice gold massively. Well?

  • SN

    The economic evidence elsewhere does seem to support chart 1. In 1980, interest rates were in double digits nominally and positive in real terms after a decade of negative real rates. The Shiller PE (or Dow/ Gold ratio) was in single digits at the bottom of a second great depression/ prolonged credit contraction that had been masked/buffered by currency dilution. The mood of the country as described in Warren Buffet’s letter to Berkshire shareholders was one of despair with stockholders “suffering” and he describing the value of Berkshire as remaining equivalent to an ounce of gold for over a decade. His own emotional state may explain how he lapsed into using the financially unmentionable 4-letter word.

    I agree with Steve Roach’s assessment that Fed has been treating the collapse of the Greenspan 2000 tech bubble with the Greenspan/Krugman/ Bernanke 2008 real estate bubble whose collapse in turn was treated with the 2015 Bernanke/ Yellen bond bubble.

    The Shiller PE just peaked above the 1966 peak. We are only halfway through the 3rd great depression. When we hit the equivalent of the 1980 bottom, the country will be in an ugly mood financially with single digit Shiller PE ( or Dow/ Gold ratio). We have a long way to go.

    I only just discovered your website and have been going through your archives. Great work!!