Over-Valued Stocks And Under-Valued Gold

Clive P. Maund’s interest in markets started when, as an aimless youth searching for direction in his mid-20’s, he inherited some money. Unfortunately it was not enough to live a utopian lifestyle as a playboy or retire very young. Therefore on the advice of his brother, he bought a load of British Petroleum stock, which promptly went up 20% in the space of a few weeks. Clive sold them at the top…which really fired his imagination. The prospect of being able to buy securities and sell them later at a higher price, and make money for doing little or no work was most attractive – and so the quest began, especially as he had been further stoked up by watching from the sidelines with a mixture of fascination and envy as fortunes were made in the roaring gold and silver bull market of the late 70’s.

Clive furthered his education in Technical Analysis or charting by ordering various good books from the US and by applying what he learned at work on an everyday basis. He also obtained the UK Society of Technical Analysts’ Diploma.

The years following 2005 saw the boom phase of the Gold and Silver bull market, until they peaked in late 2011. While there is ongoing debate about whether that was the final high, it is not believed to be because of the continuing global debasement of fiat currency. The bear market since 2011 is viewed as being very similar to the 2-year reaction in the mid-70’s, which was preceded by a powerful advance and was followed by a gigantic parabolic price ramp. Moreover, Precious Metals should come back into their own when the various asset bubbles elsewhere burst, which looks set to happen anytime soon.

Gold-Eagle is proud to interview one the world’s leading sages in Technical Analysis, Clive P. Maund.

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Question:  Is the economic world today facing deflationary depression or a hyper-inflationary depression?  Which of the two will more likely materialize…and WHY…and what would be the catastrophic repercussions?

Clive: Hyperinflationary depression. The reason is simple. Deflationary depression would be much more traumatic, especially for the ruling class, who, apart from the risk of being ousted from power due to civil unrest, would face restrictions and inconveniences which they would be free of in the hyperinflationary scenario. This is because in the deflationary scenario they would face liquidity problems and tough choices that would never keep everyone happy. In the hyperinflationary scenario, they simply print as much money as they want and stick the bill to the general public in the form of rampant inflation later. Thus they can do limitless QE, raise the debt ceiling whenever they like and meet all obligations but in devalued currency. The population at large pays for it later via the higher inflation that must result. 

Question:  The Shanghai Stock Index of behemoth China has undeniably started a bear market, having recently plummeted more than 40% during the past 10 weeks. Moreover, it appears the trough still lies well below. Based on your Technical Analysis, how far might the Shanghai Stock Index fall before it stabilizes? And in what time frame?

Clive:  The Shanghai Stock Index will probably drop to the 2000 area by the end of next year. This is based on the fact that this sort of drop would only be retracing the gains resulting from the recent bubble fuelled by low grade speculators, which started at about 2000 in mid-2014. If world markets crashed it could head lower still.

Question:  Assuming the Shanghai bear market still has much lower ground to cover, how might this affect other major stock markets…i.e. USA (DOW & S&P500), NIKKEI, FTSE, DAX and Stoxx600?

Clive:  It will kick the ball downhill in a big way. We should keep in mind that this is a negative feedback loop situation. Demand for Chinese products is faltering because many of their principal markets, such as European markets, are mired in recession in some cases verging on depression. The Chinese market and economy was a gigantic debt fuelled-bubble, which is now imploding, with evidence of the misallocation of easy money amply provided by such projects as the construction of empty cities that no-one lives in. 

Question:  Numerous international stock market analysts are forecasting bear markets worldwide. Do you concur…and if so why?

Clive:  Yes – the reason is the massive global debt overhang that is demanding more and more urgently to be addressed, including bond markets and derivatives it amounts to some $500 trillion, dwarfing all the QE programs put together – this is why the global economy cannot gain any real traction despite the vast quantities of newly printed money. It raised its ugly head in 2008, and they have postponed dealing with it by attempting to bury it with a blizzard of money printing that has enabled them to clamp interest rates at 0 to stop the debt from compounding, but it’s still there lurking menacingly and blocking them from raising interest rates, and it’s still growing because of the continued profligacy of Central Banks and governments. It is this crippling debt that is forcing many countries into recession/depression and thus threatening global bear markets. The key point to grasp is that this debt cannot now be paid down, it’s too late for that – it is so vast that any attempt to do so would could a catastrophic global depression. This is why governments will opt for the easier Plan B of inflating the debt away, which is why we can expect them to elect the hyperinflationary depression and here we should note that in this latter situation you could have stock markets that are rising nominally, but falling in real terms. i.e. they are not rising fast enough to cover the decreasing value of money. It is important to note here that when we talk about hyperinflation we do not mean that the US will turn into another Zimbabwe overnight, where you needed a trillion dollars to buy a bag of potato chips, but inflation could ratchet up to seriously painful levels such as 30 – 40% per annum and eventually higher.     

Question:  How much longer do you believe Germany will support the indolent PIIGS (Portugal, Ireland, Italy, Greece and Spain)?  Will it be Germany that throws in the towel and revert back to the Deutschmark currency, or will Greece first abandon the Euro Union…and revert back to its monumentally devaluated Drachma currency?

Clive:  Europe is in decline, there can be little doubt about that, and Germany, which is the economic powerhouse of Europe, has suffered a series of heavy blows, with the VW scandal and its consequent damage to Germany’s reputation, and now hordes of immigrants arriving with high expectations. These immigrants are just the vanguard – they will later ask their extended families to follow them over. It is unclear which country will ditch the euro first – the main point is that there is growing discord and disunity which looks likely to lead to the eventual abandonment of the euro. The origins of this chaos were that debts were never consolidated when the euro was created, so there was never true unity at the outset, and Britain has stood by on the margins waiting to “throw a spanner in the works” when the opportunity presented itself, which it looks like it has now.

Question:  In the event of the Euro Union dissolution (by whatever means), what effect will it have on the price of gold?

Clive:  The only reason that gold has been on the back burner in recent years is that in opportunity cost terms it has made more sense for investors to be invested in the broad stock market, which has been both rising and paying dividends. By its nature, a hyperinflationary depression involves a combination of high inflation and economic stagnation. Anyone who remembers the 1970’s will know what high inflation does for the price of gold, and the economic stagnation will mean weak results for many mainstream companies, meaning that the broad stock market is less likely to perform well, which will make the now horribly undervalued Precious Metals sector comparatively more attractive.   

Question:  It is a well-known fact less than 5% of the world’s total investments are today in some form of gold. In your considered opinion how much gold should every investor have as a percent of his/her portfolio?  And even more precisely, what is the preferred kind of gold investment:  Gold Bullion, Gold Coins, Gold Futures or Shares of Gold Mining companies?

Clive:  Given that gold and silver have reacted back heavily for several years whilst the broad stock market has forged ahead, and that Precious Metals stocks are now extremely cheap after having been trashed out of all proportion to the losses in gold and silver themselves, the case for the sector could not be more compelling, especially given the environment of hyperinflationary depression that we are moving towards. For these reasons it is considered prudent for investors to aim to build up their percentage holdings in the sector to at least 20%. Latest COTs are suggesting that the sector will drop back again over the short to medium-term, which should provide an excellent and possibly final opportunity to build up positions in the sector at “fire sale” prices ahead of the eventual inflationary ramp up in gold and silver prices. Gold bullion is an ideal investment, but it should be stored in a reputable depository in a politically secure location. Gold ETFs can be used for trading purposes, especially the leveraged ones, but you cannot have 100% trust in these instruments in the way that you can in gold, and the same holds for futures. The stocks of the better gold mining companies will be an ideal investment in the not too distant future, because they are already horribly undervalued compared to gold itself, and thus have the potential for very substantial capital appreciation, combined with, in some cases, the prospect of a good dividend yield.

Question:  What asset classes are grossly over-valued today?  Among the over-valued stocks, are there any sectors you would aggressively SHORT?

Clive:  The main western stock markets such as Germany, the UK and US are overvalued and various property hotspots come to mind, like London and San Francisco, where prices have risen to fantastic levels – this is indicates the late stages of a bubble. First the price rises will stall out and buyers will pull back, then sellers will have to slash prices aggressively to complete sales. Good market sectors to short are Biotech, which is a bubble in the early stages of bursting, the bloated and vulnerable Junk Bond market and Tech stocks, which are overvalued.

Question:  What asset classes are considered today very UNDER-VALUED relative to historical standards and current global economic conditions?

Clive:  Commodities and in particular the Precious Metals sector, although we should be wary of buying too soon as another dollar upleg appears to be in prospect. It’s all a question of timing, as ever. COTs currently indicate that another heavy downleg is in prospect, probably due to another big dollar upleg, but once that has run its course that should be fantastic bargains to be had in the commodities space and especially in the Precious Metals sector.

Question:  What is your near-term price forecast for gold and silver during these troubling and volatile times? And your Gold Price and Silver Price Forecasts for 2020?

Clive:  Commercials have built up heavy short positions in both gold and especially silver, probably due to the expectation of a strongly rising dollar as the euro collapses, and for this reason we can expect gold and silver prices to weaken over the short to medium-term, but this does not reduce the appeal of gold and silver, on the contrary it will provide an excellent opportunity to build positions ahead of the major bull market that should result from the increasingly desperate attempts by Central Banks to stave off the crushing effects of the gigantic debt overhang by printing money at an ever increasing rate. It is crucial to understand that it is the debt overhang that is exerting massive deflationary pressure, and the effort to deflect it by printing money (QE) that will ultimately lead to hyperinflation coupled with depression. As governments grow increasingly desperate they are likely to resort to additional measures that will threaten traditional ways of saving and investing. The bond market cannot be trusted, for the simple reason that most bonds will be being issued by entities that are financially unsound. Depositing large sums in banks is unwise for two reasons – pitifully low rates of interest, that may even be negative, and the growing risk of bail-ins, which is a euphemism for theft from depositor’s accounts. Likewise, pension funds may become the target for government appropriation and so the prudent investor will want to take charge of his own pension money and manage it. It is this combination of low or negative interest rates, and the growing risk of the looting of bank accounts and pension funds that will make gold (and silver) more and more attractive investments over time, although it will be very important that such investments are stored in secure locations.        

Question:  What do you see for the US Dollar and the Euro during the next 12 months? And in this regard, would the implosion of the hapless Euro Union and its tottering currency panic investors to flee to the safer US Dollar or to the traditional store of value gold? 

Clive:  The euro looks like it just beginning another major downleg, which could turn out to be of similar magnitude to the devastating downleg from the Spring of 2014 through the Spring of 2015, which saw the euro drop from a high at 140 to a low at 105, a massive drop. This will be a reflection of growing crisis and disunity in Europe. If so we are looking at the euro dropping to 80 or lower. Naturally this would cause dollar investments to soar, and in this scenario we would expect to see the dollar index rise to at least 120. It is considered unlikely that gold will be a major beneficiary at this time – on the contrary it could drop to the $800 area, but it will be a major beneficiary once this euro downleg and dollar upleg has run its course, and inflation starts to build in a more serious manner. For more details, please see my analysis:  Why The Uber-Bearish Precious Metals COTs Portend A Plunging Euro…

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Gold-Eagle’s staff and its global readership are very grateful to Clive P. Maund for taking the time to share his insightful and timey wisdom with us.  Visit his website at http://www.clivemaund.com/