Mr Bear: The Biggest Precious Metals Bull

March 6, 2016

Mr Bear treated us to another day of extreme volatility on Tuesday.  Although it was a positive day, that doesn’t really matter as the Dow Jones 200 count (the number of days the Dow Jones moves more than +/- 2% from a previous day’s close in a running 200 day sample) is now at 15.  Ever since the days when taxis on Wall Street were drawn by horses, with rare exception the 200 count just doesn’t reach 15 during a bull market.  

The count only includes trading days, no weekends or holidays.  As of Friday’s close the 200 day sample spans from 20 May 2015 to 04 March 2016, with the first 2% day of the 15 currently in the count occurring on 20 August.  That gives us three months (June 2016) until the 200 day sample begins to drop some of the 2% days from late last summer and fall.  If Mr Bear is taking a nap the 2% days will stop coming and we’ll see the 200 count begin to fall in the summer.  But if he begins to feed again (as he did last August/September and in January) the count will continue rising and we’ll see the “market experts” begin to sweat on national TV.

I expect we’ll see Mr Bear coming back to feed on market valuations before June.  I base my opinion on the chart below, plotting the Dow Jones daily volatility’s 200 day moving average.  It broke above its 0.75% line on January 15th and since then has been accelerating to the upside.  It closed this week at 0.83%, which tells us daily volatility in the market is increasing, and has been since December 2014.

There are 116 years of market history in the chart below.  With the exception of the April 1942 Dow Jones 50% bear market, every time the Dow’s daily volatility’s 200 day M/A broke above its 1.00% line the market bulls received a good mauling from Mr Bear.  That includes the little rise above the 1.00% line in October 2011 when Mr Bear clawed back 25% from the Dow Jones.  A similar move today would take the Dow Jones down to 13,700.

At the end of the week the Dow Jones found itself far above 13,700.  In fact in the BEV chart below it broke above its -7.5% line.  If it’s really a bull market the Dow will continue to break above these key BEV lines until we reach a new BEV Zero, or new all-time high above 18,312.39.  That could happen.  But the same thirty companies trading on the Dow also have exposure to the huge problems in the bond market (see Bloomberg article below).   It’s hard to imagine a genuine bull market at the NYSE while a significant number of its constituent stocks are in danger of declaring bankruptcy.

During bull markets it’s easy to look like a genius; you simply buy and hold your favorite stocks.  The problem with retail investors is that their success is dependent on knowing when to sell and walk away from the stock market, for years at a time if necessary.  They’re always looking for reasons to buy, even when the time comes to be looking for reasons to get the hell out of Dodge City.

The corporate debt burden today in America is overwhelming.   Many trillions of this debt were borrowed for frivolous share buybacks to support market valuation, which has also casted doubt on the validity of the earnings per share data.  The Bloomberg article below is an eye opener.

“While the majority of debt that needs to be repaid is investment grade, it’s unclear whether it’ll remain so by the time it matures. In just eight weeks, credit investors have witnessed more fallen angels, or investment-grade companies getting downgraded to junk, than in any calendar year since 2009.”  - Lisa Abramowicz, for Bloomberg 29 Feb 2016

Considering the stock market seven continual years of gains since March 2009, this is an excellent reason to walk away from the stock market.   Until investors see the inevitable massive debt and derivative counterparty defaults now in our headlights move into our rearview mirrors, this is a time to be cautious.  Until then investing in something with no counterparty risk, (such as gold and silver) just makes sense.

Let’s compare the current bull market in gold and silver with the 1969-1980 bull market in the table below.  Gold rose from $41 to $825 an ounce, an eleven year gain of 1918% followed by a two decade long bear market that took gold down to its absolute bottom of $253 in July 1999; a 69% decline

During these two decades the price of gold only dropped because in the minds of the investment public the stock market was on fireAlso fears of double-digit CPI inflation and disastrous market mishaps were set aside because of the total trust in Alan Greenspan, and in America’s “regulated” markets.  This trust lasted until the 2000-02 tech-wreck bear market, the point in time when the price of gold and silver once again began rising for the first time in decades.

Looking at gold’s second bull market (1999-2011), gains were not nearly as impressive as from 1969 through 1980: 644% compared to 1918%.  However during gold’s first bull market the Federal Government apparently made no attempt to manipulate the price of gold.

"Joint intervention (by central banks) in gold sales to prevent a steep rise in the price of gold was not undertaken.  That was a mistake."   - Paul Volcker, Chairman of Federal Reserve

A mistake Alan Greenspan admitted more than once the “policy makers” would not make again.

“Central banks stand ready to lease gold in increasing quantities should the price rise.”
-  Alan Greenspan, Chairman of Federal Reserve in Congressional testimony

So since gold has gained just 644% since its July 1999 bear market low, it’s reasonable to believe the best is yet to come.  And even more so for silver.  While gold found itself a full $1000 above its 1980 bull market high by 2011, silver never managed to surpass its last all-time high from way back in January of 1980.  Who ever heard of a bull market that failed to break above its old bull market high from four decades earlier?  And this was not even a level playing field due to four decades of rampant inflationary money printing.  Besides silver, what else can you name that is cheaper today than it was four decades ago? 

The key to understanding the following comments is understanding that the dollar used to price gold and silver is an undefined unit of currency back only by the full faith and confidence of the US Government.  And the daily management of “monetary policy” is executed by academics, like Alan Blinder, who doesn’t inspire confidence in the dollar as far as I’m concerned.

“The last duty of a central banker is to tell the public the truth.”
- Alan Blinder, Vice Chairman of the Federal Reserve, June 1994

Ultimately the dollar price of an ounce of gold or silver is less important than how many ounces of gold and silver bullion one has in their possession.  The dollar is a doomed unit of exchange, while gold and silver have a five thousand year history of retaining their value – come what may. 

But trends in the gold and silver markets are currently driven by the prices of commodities contracts defined in dollars, which promise to deliver gold and silver that doesn’t exist.  Less than 1% of these contracts actually result in a delivery of physical bullion.  If just 3% or 4% of these contracts ever needed to be settled with actual bullion, the resulting purchase of physical bullion on the open market would drive up the price of bullion internationally. 

But the vast majority of these contracts (99%) are not settled with a delivery of physical bullion.  Some are rolled over to purchase another futures contract.  Many are cash settled, and at times large premiums are paid to cash settle rather than be forced to source bullion on the open market to settle the contract.  

So how far could gold and silver increase in dollar terms?  In the 1990s when monetary inflation from the Greenspan Fed was flowing into the stock market, semiconductor stocks in the DJTMG increased 6700% from 1989 to their peak in 2000.  The table below from Barron’s 09 January 1989 through its 27 March 2000 issues compares the relative performance of the Dow Jones Total Market Groups and sundry key market metrics.  Oversized market gains in the stock market were common during these twelve years, while hedges against CPI inflation and market disasters (#90 & 93) became objects of scorn.

Here’s a chart for the DJTMG’s Semiconductor index.  A dollar invested in January 1989 become sixty-seven at the top of the semiconductor’s bull market.

Comparing the semiconductor boom during the 1990’s with the eleven year bull market for gold (1969 to 1980), semiconductors gained more than three times what gold did.  Then, just as the high-tech shares began deflating in 2000, gold and silver began their second bull market since Bretton Woods. 

Here’s a look at gold’s Bear’s Eye View (BEV) chart since its July 1999 low of $253.  As always with a BEV plot, data points on the red 0.00% line (BEV Zeros) are either new highs of the move, or (for gold after 06 November 2007) new all-time highs.  Data points below the red BEV Zero line are the percentage decline from the high of the move, or from the all time high.  

Gold has apparently bounced off its deepest correction low of the bull market, which is a positive sign.  Note the red box covering 2009.  Beginning in October 2008, gold advanced 40.30% in just eighty-two trading days.  Using gold’s November 2015 low ($1057) as a base, a similar 40% move would take gold up over $1400 (BEV 25% Line) by the end of this month.  This is not a prediction on my part; I’m just noting that at week’s end, gold has advanced 19.53% from its lows of November 2015 – half way there.

Looking at gold and its step sum below we see how a bear box formation typically resolves itself.  After the box closed, the exact point in time when the step sum’s trend (Red Plot) stopped fighting the declining price trend (Blue Plot), it finally collapsed along with the price of gold.  Next the price and step sum trends both bottomed together and reversed upwards.  Using step sum analysis; below is as strong a buy signal as we’ll ever get.

There’s something strange going on in the silver market.  Typically silver leads gold during both bull and bear markets.  This means that in good markets the number of ounces of silver an ounce of gold can purchase (the Silver to Gold Ratio) should over time grow smaller.  However, as we can see below since the November lows the gains in gold have been greater than those for silver, causing the SGR to increase.  Gold is still good, but at today’s prices silver is better.

Looking at silver’s BEV chart (below) we see what an ugly correction (E) this has been since April of 2011: a 1222 day 72% decline.  For any other investment I’d have to say it would take years before we’d see another new BEV Zero (new all-time high).  But silver is different; it may shock us at just how quickly it will break above $50 for the first time in history, taking the BEV plot below back up to its red line for the first time in a half a decade.  Be that as it may, after a five year 72% decline, at today’s prices silver is still a superior investment, with lower risk than any of the current glamour stocks now being promoted in the financial media.  In the years to come I expect their losses will prove to be silver’s gains.

Here’s silver’s step sum chart.  Gold’s step sum chart is flashing a strong buy but silver’s message to us is muted.  Since February 1st the SGR has increased by four and a half ounces of silver (chart above).  However had it decreased by these same four ounces of silver (as it should have with the gold market rising), silver today would be around $17.20 an ounce, and we’d see a much stronger buy signal below.  

If silver actually is in a bull market, and I believe it is, time will cure what now ails its lagging performance.  Look at what silver did from 05 February 2010 through 29 April 2011 in the chart below; it tripled, increasing from $14.82 to $48.58 in just over a year.  A $33.76 dollar, 227% advance in just fourteen months.  One would have thought that silver’s performance during those fourteen months would have gotten some attention in the investment world, but the media spent more time covering the early stages of the subsequent correction than on the advance itself.  Wall Street and the financial media hate gold and silver because they fear capital flight from the financial markets being drawn to a bull market in the old monetary metals. 

What will the price of gold and silver be when hundreds of trillions of dollars, yen and euros flood into them?  After all the fraud and monetary hijinks Greenspan, Bernanke and now Yellen have used to manipulate the stock and debt markets for the past few decades, “policy makers” have good reason to fear rising gold and silver prices during the coming bear market in financial assets.  Just think of Mr Bear as the biggest precious metals bull out there.

So when will the fireworks in the old monetary metals begin?  I can’t give you a date, but I expect the gold market will once again see daily moves greater than +/- 3% just as frequently as it did during the 1969 to 1980 bull market.   As shown in the chart’s table, ever since December 2000 gold has only made ninety one 3% daily moves, and daily moves of more than 5% are rarely seen.

If you ever doubted that silver didn’t trade exactly like gold, the chart below goes a long way of proving that point.  Considering that silver is more volatile than gold, I use a 5% threshold.  Silver saw very few 5% daily moves during the 1970s up until August 1979 when it suddenly spiked from less than $10 an ounce to nearly $50 in just ninety-eight trading days.

Since December 2000 silver has seen plenty of 5% days, but the really big daily moves commonly seen during the 1980s are nowhere to be seen.  But that was during a bear market so it’s hard to say what silver’s daily volatility would have looked like if TPTB on Wall Street and in Washington hadn’t been sitting on it since 2000.  Still, when the financial markets begin purging the many decades of inflation now bloating them, expect to see some record daily moves in the price of gold and silver as capital in full flight comes their way.

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

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