The Implications Of The Pending Collapse Of Fiat Paper Money (Part II)

January 31, 2015

Part one of this article is HERE.

The Next Stage Bull Market in Gold and Gold Equities

Over the longer term, the price of gold and gold equities and stock market prices always move in opposite directions.  This is most apparent in their price movements within the Long Wave seasons. I’ll explain it for you one more time. I think that it is so important that this phenomenon is understood, because it allows us to make rational investment decisions based upon these Long Wave seasonal secular bull or bear markets.

Each Long Wave cycle lasts between 50 - 60 years, although this, the fourth cycle, has been extended beyond 60 years as a result of the exorbitant reliance on paper money. The cycle is divided into the four seasons. Each Long Wave season closely follows the characteristics of the four annual seasons. The Long Wave spring heralds the rebirth of the economy; summer is the time when the economy blooms and reaches its fruition. Summer is always the season of inflation which peaks at the end of the season. I call autumn the 'feel good period', because it has always been the season of the most intense and successful speculation in stocks, bonds and real estate. The end of the Long Wave autumn is signalled by the end of the great stock bull market. Winter is the time that the economy dies or at least falls into a prolonged sickness brought about by the collapse in debt that has been building in each of the past seasons, but particularly in autumn. (All of this is explained in some detail in these two charts).

The Longwave Principle

Lifetime Economic, Financial and Investment Map

The Long Wave spring is the season during which the economy resumes its growth following the winter depression.  As a result, spring is very bullish for investing in stocks and bearish for investing in gold. In the fourth Long Wave spring (1949-1966) the value of the DJIA increased from 161 points to 995 points. In the summer (1966-1980/82), the inflationary season, investing in gold and gold equities is bullish and investing in the general stock market bearish.  Accordingly, the price of gold rose from $35.00 (U.S.) per troy ounce in 1966 to $850.00 (U.S.) per troy ounce in 1980, whereas the value of the DJIA fell from its record high of 995 points in 1966 to 777 points in August 1982. The Long Wave autumn is always the most bullish season for investing in stocks and the most bearish for gold and gold stocks. In the current fourth Long Wave cycle autumn  the DJIA increased from its summer ending bear market low of 777 points in August 1982 to 11,750 points in January 2000, whereas the price of gold fell from $850.00 (U.S.) per troy ounce to $252.00 (U.S.) per troy ounce in 1999 and 2001.

The Long Wave winter is very bullish for gold and gold equities and is very bearish for the general stock market. 

I consider the 2000 price peak to be the end of autumn, following the typical mass speculation phase, which was concentrated in high technology stocks, especially dotcom new issues. (Previous autumn speculations - 1816-1837 - canal building, expansion into the US mid-west; 1866-1873 - railways; 1921-1929, industrials led by autos.)  We have seen how the stock prices during this Long Wave winter, following every  major downward price movement, as between 2000 and 2002 and 2007 and 2009, have been forced higher through central bank extreme fiscal and monetary stimulus made possible by a fiat paper money system. As we have noted, that overt manipulation of stock prices is likely to be concluded in 2015 with devastating consequences.  (The inverse Long Wave seasonal price relationship between stocks and gold can be seen on Dow/Gold price ratio chart, here).

Since the onset of the current Long Wave winter, the prices of gold and gold equities have been in their expected seasonal/secular bull markets. Let's examine the facts.  The price of gold made a double bottom in 1999 and 2001 just above $250.00 (U.S.) per troy ounce. This completed its secular bear market that had originated from its secular bull market price peak of $850.00 (U.S.) per troy ounce in January 1980. It is currently priced above $1,300.00 (U.S.) per troy ounce, which is 520% higher. The HUI Gold Bugs index reached its secular bear market price low of $35.00 in July 1999. It is currently trading above $190.00, which is 540% higher than it was priced in 1999. The HUI reached a record price high $638.00 in September 2011. Since these 2011 price peaks, the HUI, like the gold price has been in a long term correction. These long term corrections have been extended by blatant manipulation of the gold price.

I have explained this inter relationship between these secular seasonal bullish and bearish cycles and long term cycles in an Ian's Investment Insights that was published on November 22, 2013 and I urge you to read it. In case that you don't, I am going to draw some details from that report.

"Within these 16 to 20 year secular bull and bear markets there are usually four and a half long term cycles. These long term bull/bear cycles generally last 4 to 5 years. In bullish secular markets, the bullish phase of the long term cycle can be as much as 70% and the bearish phase 30% of the total time of one complete long term cycle. In bearish secular markets, the opposite is likely, with the bear portion of the cycle taking longer to complete than the bullish phase."

"In bullish secular markets each successive long term cycle generally makes higher high prices and higher low prices. In bearish secular markets the opposite is true, each successive long term cycle usually makes lower price highs and lower price lows than the previous long term cycle. The half cycle always occurs at the end of the bull or bear long term cycle. A bullish secular cycle starts from a price low and ends on a price high, which is the bullish phase of the fifth long term cycle. Since secular bull markets start from a price low, each long term cycle is measured from price low to price low. A bearish secular cycle starts from a price high and ends on a price low, which is the bearish phase of the fifth long term cycle. Thus, in bearish secular markets each long term cycle is measured from price high to price high."

This is the schematic which outlines the relationship between these seasonal secular bull and bear cycles and the long cycles that operate within them.

In that November 2013 publication of Ian's investment insights I have shown several different price charts which demonstrate this relationship between secular cycles and long term cycles. In addition, I have demonstrated how short term and intermediate term cycles relate to long term cycles.

Because gold and the HUI have been in the Long Wave winter secular bull market since their 1999 and 2000 price lows (Gold $250.00 (U.S.) and the HUI $35.00). Let us examine the secular bull market chart of the HUI that I presented in that November 2013 publication.

HUI Gold Bugs Index Monthly Chart.

Chart: Thomson Reuters

The HUI secular bear market commenced in 1980 at the end of the Longwave Summer, when the prices of gold shares reached their peak, and ended in November 2000 at the onset of the Longwave Winter, when it reached a price low of 35.31. A new secular bull market and with that the first long term cycle originated from this secular bear market price low. The bullish phase of this first long term cycle ended in 2003 when the HUI reached a price high of $258.60. The first long term bear phase started from that high and ended in May 2005 when the HUI reached the bearish phase price low of $165.71.  From that price low the second long term cycle commenced its bullish phase. This ended in March 2008 when the HUI price peaked at $519 .68. The following bear market phase ended at the price low of $150.27 in October 2008. From that low the 3rd long term cycle started its bullish phase, which ended in September 2011 at a record price high of $638.59. The bearish phase of cycle started from that record high price level.

As I saw it at the time of my writing in November 2013, the bearish phase ended in June 2013 when the HUI reached a low of $206.66, on the same day that the gold price was hammered down more than $50.00 (U.S.) in an obvious official intervention.

Since then there has been an ongoing official crusade to hold back the price of gold in order to promote the dollar's legitimacy as the world’s reserve currency. As a result, the long term bear market phase has been extended significantly beyond its normal time frame. However, that extension now appears to be over and the fourth long term bullish phase should now proceed but with increased vigour. This on two accounts; first, manipulation of the prices to the downside will be countered by the cycle reverting to normal, forcing prices higher to adjust for the overprice reaction on the downside; second as the secular bull market progresses  each successive long term bullish phase attracts more consensus to the bullish camp. Anyway, it is normal for each successive bullish phase to make a higher price than the preceding bullish price peak. Thus, this fourth bullish phase price peak should see the HUI reach a price peak significantly higher than the price peak reached at the end of the third bullish phase, which was $638.59.

I'm going to return to discussing monthly key point reversals, if only to show how significant they are in generally pinpointing a long term trend reversal. If you review the Monthly chart of the HUI shown above you should notice that every long term bullish phase ended with a monthly key point reversal price high, which should have acted as an alert that the bearish phase of each of these long term cycles was about to commence. I have already apologised to my readers in an earlier writing for not noticing these reversals particularly the reversal signalled at the end of the third HUI bullish phase reached in September 2011. That is why I am now so alert to these Key point reversal signals, in particular monthly key point reversal signals.

To that end, I want to draw your attention to the fact that the HUI made a key point reversal low in November 2014.  Here's the monthly price chart.

HUI Gold Bugs Index Monthly Price Chart November 2009 - Present

Chart: Thomson Reuters

The HUI made a new low of $146.00 in November 2014 below the preceding October price low of $152.00, which itself was a new price low for the Index. The November closing price was $163.00, which was $7.00 higher than the October closing price.

This monthly key point reversal simply adds evidence to the fact that gold stocks made their price lows in November 2014 and have now started their fourth long term bullish phase. Since that November price low in a little over two months the HUI price has increased by 30%, that's bullish.

Because we are confidently predicting that the HUI started its fourth long term cycle from the November 2014 price low, we can anticipate that the bullish phase of this cycle will last approximately 70 % of the time it takes the cycle to run its bull/bear course. Looking at the past three long term HUI cycles (See Page 10), this long term bullish phase should run for approximately three and a quarter years, which in this case would extend into early 2018.  By that time the HUI should have reached a price higher than it reached at the top of the bullish phase of the third long term cycle, $639.00. Based on the amounts that each long term cycle high exceeded the earlier cycle high, I have conservatively projected that at the HUI price peak of the bullish phase of this fourth long term cycle will attain $830.00. This is equal to a 30% increase over the third long term cycle price high of $639.00.

The price of gold, itself, is also beginning its fourth long term bullish phase from a price low of $1,132.40 (U.S.) which was reached on November 7, 2014. This bullish phase should, like the HUI, reach its price peak in early 2018. Using the percentage increases experienced in each successive bullish phase of the long term gold price cycle, I have conservatively calculated that gold should reach the top of the bullish phase of this fourth long term cycle priced at approximately $ 3,360.00 (U.S.) per troy ounce.

These  predictions on both the likely termination of the bullish phase and price achieved at that time are based on past, long term cycles, which for the most part of been reasonably consistent with regard to both time and price. However, we are now predicting a monetary collapse, and that is likely to result in a dramatic increase in the gold price as the rush to own the monetary metal turns into a stampede. In that case the projected gold price of $3,360.00 (U.S.) might be considerably surpassed and much more quickly than by early 2018. That too, would lift the prices of gold shares much higher than has been projected.

Conclusion

A gold price of $3,360.00 (U.S.) should be clear warning. The world is heading into a monetary catastrophe the likes of which have never before been experienced on a global scale. This failure of the global fiat paper money system will throw the world into an economic depression that will make the 1930s appear like a mild recession.  In the early 1930s world trade contracted by 70%; U.S. GDP fell by 45%; 10,000 U.S. banks failed and unemployment reached 25% and, as I have already recounted, the Dow Jones Industrial Average lost 90% of its value. This time it is likely to be much worse.

Western central bankers alongside the Japanese central bank are in a state of panic. They have ramped up their printing presses at a frenetic pace in their desperate efforts to keep their fiat paper currencies from dying.  They have accumulated debt on top of an already monstrous debt mountain to keep the Ponzi scheme alive. The world is awash in debt. That debt is supposedly hedged by a mega pyramid of derivatives. The entire facade is a sovereign default away from a financial disaster much greater than 2008. That crisis almost destroyed the entire Western banking system; this one will. 

Russia, China and other nations have been accumulating gold at a furious pace in preparation for this looming disaster.  Many European countries have been trying to repatriate their gold holdings for the most part out of the U.S. Germany is experiencing difficulty on this account. Central bank gold purchases are currently running at about 500 metric tonnes per annum or a little less than 20% of total annual production. That does not include the secretive amount being amassed by the Chinese central bank, which we must assume is considerably in excess of the 500 metric tonnes being accumulated by all other central banks. These central bank purchases began in 2010 reversing their ongoing gold sales, which they had been doing since at least the year 2000. Why?  Obviously, they now trust gold more than their fiat paper.

The Second Coming by William Butler Yeats, published in 1921.

Turning and turning in the widening gyre

The falcon cannot hear the falconer;

Things fall apart; the centre cannot hold;

Mere anarchy is loosed upon the world.

The blood-dimmed tide is loosed, and everywhere

The ceremony of innocence is drowned;

The best lack all conviction, while the worst

Are full of passionate intensity.

This poem written just after the carnage of the First World War describes a tumultuous and frightening period. "The Second Coming was intended by Yeats to describe the current historical moment (1921 in terms of these gyres. Yeats believed that the world was on the threshold of an apocalyptic revelation, as history reached the end of the outer gyre (to speak roughly) and began moving along the inner gyre. In his definitive edition of Yeats's poems, Richard J. Finnian quotes Yeats' own notes:"

 "The end of an age which always receives the revelation of the character of the next age is represented by the coming of one gyre to its place of greatest expansion and the other to its place of greatest contraction... The revelation that approaches will...take its character from the contrary movement of the interior gyre."

In other words, I think that this poem is descriptive of the approaching storm as we move from the gyre of plenty and 'greatest expansion' to the gyre of 'greatest contraction'.

I am filled with a deep sense of foreboding. The monetary tsunami that is upon us will bring about a worldwide economic collapse far worse than any previous depression.  Everything is pointing to the impending disaster. Commodity prices, not just oil, are beginning to hasten their downwards spiral. The price of copper is down almost 45% from its 2011 price peak. Copper has long been known as the metal with the PhD in economics since its price is directly associated with the health of the economy. Most currencies relative to the U.S. dollar and more especially gold are in a freefall. The Japanese Yen is down almost 40% against the dollar and since May 2014 the Euro has depreciated 20% against the U.S. dollar. U.S. stocks are beginning to look as if the projected vicious winter bear market has begun with the DJIA down about 1,000 points from its 2014 Boxing Day level peak.  Gold on the other hand has been increasing in value versus the rising dollar. It looks very, very bad.

Are You Ready for This?

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Note: In our February 20, 2015 publication of 'Economic Winter', which will bear the title "The Implications of the Impending Collapse of the Fiat Paper Money System" we will explore in some detail what might be the consequences of this paper money failure.  For example will privately owned Central Banking continue to operate? 

For my take on Silver read ‘Economic Winter’ Volume 60, Issue 1, June 17, 2014 “Gold vs Silver”

This information is not intended to be investment advice.  Members of the Longwave Group may acquire, hold or sell securities referred to in this document.  The companies referred to herein may pay a fee to be listed on the Longwave Group website or referred to in this publication.  See the disclosure under the heading “Disclaimer” on this page for further important information.

Ian A. Gordon, The Long Wave Analyst, www.longwavegroup.com

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”Those who cannot remember the past are condemned to repeat it”. Santayana

One ounce of gold is so ductile it can be drawn into a wire 50 miles long