Signs Of A Top For The Precious Metals Bull Market?
Jerry Western
October 30, 2009
Ok. I know. I may be a wee bit early in thinking about a top right now being that we recently crossed the not-insignificant four digit barrier. But I think that we need to be constantly vigilant and thinking about what the top will look like when it arrives if we are to be able to recognize it when it inevitably arrives. Though some are still questioning if we're in a bull market in the precious stuff, others are thinking maybe $1000 is the top, while still others are calling the gold market a bubble. I certainly do not. Let me be clear, I believe we're only about half to two-thirds through this bull time-wise, and only just off the bottom price-wise. Yes, I'm a gold bull.
Before we move on, I'd like to add a bit onto my last piece - How High Could Gold Go? First, I had neglected to mention silver, which I believe may outperform gold dramatically before the bull has run its course. Silver rose more than 38 fold in the 70's bull market; from a fixed price of $1.29 to $50 ($52.50 CBOT). Silver bottomed just above $4 in 2001. 38 x 4 = $152. The Silver/Gold ratio bottomed at ~ 16:1 in 1980. In other words, you could exchange one ounce of gold for 16 ounces of silver near the end of that bull market. Today, the ratio is about four times higher. Should gold get to $6,375 gold and the ratio return to 16:1 at the top, silver will reach almost $400 an ounce. That's a 100 fold increase from its pre-bull low.
Also, Mike Rozeff just published another piece and found some potential gold values of $11,090 to $31,740.
Finally, a couple of responses to readers e-mails. One reader asked if Jim Sinclair really predicted a gold price of $20,000. Perhaps 'predicted' was a wrong choice of word. Perhaps 'suggest' would have been more appropriate. I did write in my previous article 'Some are a forecast of where the analyst thinks gold will top at the conclusion of this bull market and some are only theoretical constructs.' I'd put Mr. Sinclair's number in the latter group. I don't want to put words in his mouth, so here is the pertinent passage and link from his website.
"I recently completed the same mathematics that helped me so much in 1980 to determine the price that would be required to balance the international balance sheet of the U.S. Balancing the international balance sheet is gold's mission in times of crisis. I recently did the math again and was sadly shocked to see what the price of gold would have to be to balance the international balance sheet of the USA today. That price for gold is more than twice Alf's projected maximum gold price."
www.gold-eagle.com/editorials_08/field112408.html
Another reader didn't like the number 286 million ounces as official gold reserves and provided a number of 2,61.5 million ounces. I would say that neither number is reliable as the U.S. gold reserves have not had an independent third party audit of the physical bars in over a half-century. His number may be closer to the truth than mine but, Who Knows? I'm sure some persons do, but they 'ain't tellin'. Audit the Gold Reserves! Audit the Fed!
Now, on to the topic at hand…
Eleven signs that the gold market may be topping.
All markets tend to fluctuate from bull to bear (or bubble to bust if you prefer) and back again over varying periods of time and for various reasons. Certain market sectors may be in alignment (stocks and bonds 1982-2000) at any given point in time or may be traveling in opposite directions in a big picture/long term view spanning years or even decades. Those sectors traveling together are said to be positively correlated while those in opposition are said to be negatively correlated. The dollar and gold are highly negatively correlated. When the dollar moves down, gold is normally up and vice versa. The dollar has been in a down trending market since the turn of the century. With dollars being created far in excess of expanding productivity and population, this trend seems likely to continue as each dollar created in excess degrades each existing dollar.
Clue #1: We aren't likely to see a gold top until the dollar stops its fall. With the U.S. Government's massive financing needs, bond sales (i.e. dollar printing) aren't likely to abate any time soon. Watch the dollar and the number of new ones created.
The last bull market in gold and silver lasted from 1971 until 1980. The subsequent bear market in gold lasted about 2 decades, until the present bull began. The precious metals tend to run in sync with the general commodity cycles. Commodity cycles tend to last 15-20 years and sometimes up to 30 years.
Howard Katz, in "Commodities On The Move" , states:
"If you are a regular reader of my articles, then you know that I have been continually preaching the commodity pendulum. This is a series of massive swings in commodity prices (each lasting 10-20 years). The first swing was down (in real terms) from 1963-71. The second swing was up (in both real and nominal terms) from 1971-1980. The third swing was down again (both real and nominal) from 1980 to 1999. And the fourth swing was up (both real and nominal) from 2001 to the present."
Clue #2: We're about 8 or 9 years into the upswing with perhaps six or more to go. Furthermore, the nature of bull markets is that there occurs a 'blow off' (parabolic) top at the completion of the bull move (Think Nasdaq circa 1999-2000). This means that the big gains come in the latter stages of the bull. We've seen minor blow-offs but the big one should be ahead of us.
Another measure to be mindful of is the multi-fold price increase of gold during the last bull market. We likely need to meet or exceed the percentage gains of the 1970's gold and silver bull markets. The price of gold rose from $35/oz. at the beginning of the seventies to $875/oz. in January 1980. That's a 25 fold increase in price. The lowest low of the 1980's/1990's bear market was $255. Multiply that figure by 25 and see that this bull market may not be over until we reach or surpass $6375.
Clue #3: We haven't yet arrived at $6375. Though only time will tell, this writer is of the opinion that we'll surpass this figure this time.
A fourth measure is the Dow/Gold Ratio. This is a measure of how many ounces of gold it would take to purchase one 'share' of the Dow. With $1000 gold and the Dow at 10,000, the ratio would be 10. We simply divide the Dow by the price of gold. The ratio was near 1 in 1980 and in the mid forties in 2000. Over the last century, this ratio has reached successive higher highs and successive lower lows. It would not be surprising to see the next low below 1. Should the ratio again see parity, no one knows at what number the two would meet or cross. It could be at 5000. It could be at 20,000.
Clue #4: When the Dow/Gold Ratio nears 1 we'll likely be nearing the end of the current gold bull.
Ibbotson Associates produced a widely circulated study in 2005 concluding that gold is the only major asset class that is negatively correlated to all other major classes. i.e. Bonds, Equities, Real Estate. These markets won't all turn on a dime at the same time. There will be lead, lag, and overlap. They aren't all precisely negatively correlated with gold either. However, in broad, general, terms they tend to behave in opposition. Think gold flat to down in the 1980s and 1990s when Bonds, Stocks, and Real Estate were up.
Clue #5: When other asset classes have bottomed and begin to turn up, gold should be topping and turning down.
I remember reading (John Hathaway, I think) that in 1934 and 1982, 20-25% of all assets were in precious metals related investments. I also seem to remember James Turk saying that in 1900 40% of assets were in PMs. The market cap of all above ground gold today equals something like 1.4% of global financial assets. Don't nail me on these exact numbers but you get the idea. Think about this. If the amount of above ground gold is only appreciating at 1-2% per annum, and everyone wants in in a short timeframe, we'd have to have a 20 fold increase in the price of gold to rise from 1-2% of assets to 20-40%.
Clue #6: When a lot higher percent of all assets are denominated in precious metals, start looking for the golden exit.
Worldwide gold production peaked in 2003 and is off about 10% from that peak. Largely because of the dearth of investment in the 80s and 90s gold bear market, production is lagging today even though we've had a 300% (4x) rise in the price of gold. Not only were the miners not exploring much for those two decades, they were also high-grading their mines just to stay in business because of the low price. Today, lower grade ore is what's left and supply can't respond to price.
Clue #7: Look for a multi-year sustained rise in mining output before the market tops. Supply needs to beat demand.
All bullish pundit target numbers are met and/or exceeded.
Clue #8: Nowhere close. See my last post.
The world comes to its collective senses and returns to sane monetary policy and stops inflating all currencies.
Clue # 9: Um… never was, ain't never gonna happen.
The mainstream papers and airways have gold as the lead story almost daily.
Clue #10: Nope. Maybe stories bashing gold or telling you now is the time to sell.
Everyone you meet is talking about the gold market - how much money they're making - their next big score. etc.
Clue #11: People are still going to cash4gold parties. I see more of these commercials than buy gold commercials.
No, we're not close to a top yet. The only way we could be (and not know it) is if there occurs an exogenous (black swan) event currently unforeseen by the masses. What could one of these events be? How about the U.S. or another major power suddenly implementing a gold, bi-metallic, or some sort of quasi-gold standard? Let's say the U. S. government announces that effective immediately they will now purchase gold in unlimited quantity from any source at $10,000 per ounce? Think that'll zoom the market price right up there in a jiffy? The 'downside' as I see it is that the bull market would be over and we'd be at a fixed price again. But no worries because we were all smart enough to buy at the ridiculously low price of a mere $1000 an ounce before that announcement. Right?
About the author: Mr. Western teaches classes about sound money and the silver and gold markets. He's available for hire to speak to your organization. He can be reached at silverandgoldmoney@yahoo.com or silverandgoldmoney@gmail.com.
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