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February 26, 2017

Geopolitical Changes

With the election of Donald Trump as our President and his views espoused during last year’s election, there is expectation of dramatic changes in 2017 and beyond.  His policies of protecting and enhancing manufacturing, together with spending in modernizing infrastructure, will impact equity markets and gold.  Former Fed Chair Alan Greenspan came out for a potential gold standard and investors like Stan Druckenmiller who feared a debased US dollar got back to investing in gold.  There are fine fundamental analyses of the changes published on this and other websites.   In this article and 2 compendium articles, we examine the following questions from our cycle analyses:

  • What are the prospects on gold investments versus DOW equity in 2017-2020?
  • With rising inflation, what will happen to global currencies and gold?
  • While stock markets have been thriving so far on low market volatility, geopolitical events will drive volatility higher.  What are our investment implications?

This article treats gold versus equity investments.

Review of Our Cycle Analysis

We have published a number of articles on gold and DOW equity investments on this website. Basically, we use a flexible Fourier analysis approach on price series.  We determine the major cycles and do the forecasting by extending the cycles in time.  We believe the price series takes into account all the external factors economic and geopolitical factors.  Our analysis presented here are in agreement with various fundamental analyses. The reader is encouraged to read our earlier articles for details.

The following charts are our analysis and forecast of gold stocks, gold price and DOW equity.  They are updates to our previous analyses with more recent data.  On the whole, the results have not changed much.

Gold Stocks

Despite recent corrections, our forecast indicated that gold stock investment will be one of the best performers in 2017 and beyond.  The rapid rise in price for the period 2017-2018 will be similar to the 1979-1980 rise.  The similar peaks are labeled with “C”.

Gold Price

Our analysis on gold showed similar results.  Due to competitive currency debasement, global financial crisis and a new gold standard suggested by Greenspan and others, the gold price will be very high.  Years ago, gold expert Jim Sinclair had suggested a gold price of $10.000/oz due to massive printing known as QE’s.  We believe cycle analysis gives a valid big picture, in particular in the timing of peaks and valleys.

DOW Equity

By contrast with gold and gold stocks, our analysis showed limited upward potential as an investment.  The uptick due to the enthusiasm and election of President Trump will not last in our opinion, both from the cycle and fundamental aspects.  We expect a correction to 12,500 by the end of 2017.  Our analysis on higher market volatility (VIX) is given in another article.

Gold And Negative Real Interest Rates

Given the massive printing of paper currency and debt accumulation in major countries, gold will emerge as the “global currency” as suggested by Greenspan and other keen market observers.  As the level of inflation rate goes up, the interest rate will play a catch-up game.  The following chart taken from a recent article is an interesting analysis linking the gold price with the real interest rate. 

  • Since we expect the “real” interest will go down before it rises again, gold price will go up in 2017 as in 1980. The rise will be similar to the one in 1980 as labeled with “C”.
  • This real interest rate analysis is consistent with our cycle analysis which forecast a pent up demand for gold and a rapid rise in price to $3,500/oz.

Participation In Gold Stocks

A good measure of the public interest in gold stock investments is shown in the following chart. The chart contains principally actively traded stocks list in Yahoo. 

  • Among the heavily traded stocks/ETF’s, the gold stocks (GDX, GDXJ) and their leveraged counterparts (NUGT, JNUG) are among the highest in trading volume averaged over last 3 months.  The data is from Yahoo finance.
  • On a yearly basis, the trading volumes of Dow and S&P 500 have been decreasing since the financial crisis of 2008 while gold and gold stocks show increasing trends in trading volume.

On Silver And Silver Stocks

To complete our cycle analysis, we updated the 2 ratio analyses relating to silver:  Ratio of CEF to Gold, and Ratio of silver stock (PAAS) to gold stock (NEM).

CEF-Gold Ratio

PAAS-NEM Ratio

Our analysis indicated that silver and silver stocks will outperform gold and gold stocks in 2017.  This is a similar situation in 1980’s.

Summary

We live in a time of global changes.  Investments will not be easy, as there may be unforeseen and drastic changes.  Here we have presented an analysis based on major historical cycles.  While the intensity of the peaks and valleys may be accentuated in our analysis, we believe the timing is valid.  Gold and gold stocks will shine in 2017.  Whatever President Trump and his team will do during his term, we pray for them and encourage them to recall George Washington’s words during his inauguration on April 30, 1789:

The propitious smiles of Heaven can never be expected on a nation that disregards the eternal rules of order and right, which Heaven itself has ordained.”

Caution:  We are not professional fund managers.  Do your own research and consult financial managers for your investment advice and help.

F.T. Dao is a private investor and recently left the corporate world for technical analysis of stock markets.  He holds a PhD degree in physics and has done technical analysis of the market on the side for many years.  He welcomes constructive discussion and can be reached at:  ftdao245@gmail.com  , ftdao245@comcast.net

The purity of gold is measured in carat weight.

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