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Gold And Silver: Opportunity Of A Lifetime?
Over the past 39 years, I have rarely used the words “opportunity of a lifetime.” However, I feel there is a good chance of another one in progress. Let’s look at gold since the late 1970s. History may not exactly repeat, but often it rhymes.
In 1977, when my firm, Dohmen Capital, was founded, I started the Wellington Letter and I was correctly bullish on gold. It soared from around $120 when I recommended it to more than $800 during the next three-plus years.
Then, when gold dropped through $694 to the downside, I declared it a bear market. My recommendations to buy put options on many of the popular mining firms made fortunes for some of my readers.
Using cycle studies, I predicted in 1981 that the bear market might last 20 years and then should be followed by a 30-year bull market. I said I had no idea what would cause a 30-year bull market. Now we know. It’s the huge creation of $21 TRILLION of bank credit out of thin air by the major central banks.
The 20-year bear market prediction turned out to be right on target as the next bull market started in 2001.
I have done a lot of thinking about the precious metals and the longer term prospects. One year ago, in my February 18, 2016 issue, I wrote about the 2011-2015 decline possibly having been a cyclical bear market in the longer-term secular bull market. If that is correct, much higher highs are ahead.
The long-term chart of gold below goes back to the start of this secular bull market in 2001. Note that after the correction from 2011 to 2015, it has formed a bullish, potential inverse “head and shoulder” pattern. If it can close decisively above $1,400 I would become even more bullish.
Furthermore, the chart of the Market Vectors Gold Miners ETF (GDX) below shows a very nice, long-term bottom on these mining stocks (shaded area). I could see it going to the $40 area. Then I have to look for a potential, meaningful correction.
My Contrarian View On Gold
My view for about 40 years has always been contrary to the common thinking on gold. Popular opinions are:
*Gold is a crisis hedge: I disagree. It actually declined from above $800 to around $250 from 1981 to 2001, or 20 years. That period saw some incredible crises, such as the Thailand default, the Russian default, the long term management hedge fund bankruptcy that required a Federal Reserve rescue mission, among others.
*Gold is a fear hedge: I disagree. They never specify the fear. Is it nuclear war, a terrorist attack, a Greek or Italian debt default? Well, none of these influenced gold for the longer term.
*Rising interest rates are bearish for gold: I disagree. Actually, it’s vice versa. Interest rates rise when inflation fears rise. And rising inflation is bullish for gold as it is a “store of value.”
My view is that gold is a hedge against a loss of confidence in currencies.
What could trigger that? The $21 trillion of central bank credit creation of the past seven years that has been stuck in the banks, not being lent out. If something changes, and banks start lending again in a normal fashion, that would be inflationary. All the additional credit would compete for goods and assets.
What could cause this? One example: A repeal of Dodd-Frank and loosening other regulations that have basically stopped bank lending for the average person or business. An increasing availability of credit could unleash another speculative binge in the markets and perhaps in some sectors of the economy.
Additionally, price pressure would come from tariffs on Chinese goods. So many products are made in China. A general tariff on Chinese imports would cause a big rise in the CPI.
Furthermore, the administration is talking about a border adjustment tax (BAT). It’s estimated that would lift retail prices by 9%-10%. Consumers won’t like that. I call BAT a VBI–very bad idea.
And finally there is the “America First” agenda, which would push the cost of producing goods much higher. Companies would hike prices to make up for that. Paying workers in Mexico $8 per hour for assembling a car would go to around $40 per hour (total) for a U.S. worker. Someone has to pay for it, and that is the consumer.
Because of greater availability of money, it would be like the late 1970s when rising inflation, due to very easy money, actually caused stocks and the precious metals to be bought. Inflation soared, along with interest rates, making real assets, and even stocks, inflation hedges.
What are the inflation expectations now after years of deflation concerns? Below is a chart from the Fed of St. Louis. It shows a clear double-bottom during 2016. That’s bullish. However, the chart is near resistance. Yes, technical analysis also works on economic indicators. This suggests that there will be at least a pullback or correction in the inflation expectations if indeed expectations eventually continue higher, as we think is likely.
I also look at the recent charts of numerous other countries. Many show a strong, sudden rise in the inflation numbers. Once it gets to be a global reflation trend, there will be great opportunities for informed investors. But it will also produce the setup for some seriously adverse consequences later on.
Conclusion: Investors had a chance to make big profits with my contrarian advice since the late 1970s when Wall Street expressed opposite views. Right now I see many similarities to that same market environment. Of course, I need more confirmation. The new administration is only a few weeks old. However, so far I see signs that we could see a significant inflationary blow-off if the trends of the late 1970s are repeated.
In 1978 the new Fed chairman, G. William Miller, said he would not fight inflation by tightening money (less credit), but by raising interest rates. With that statement, I gave the inflation warning. I predicted that gold and silver would soar.
I also predicted that general stocks would become inflation hedges, something that was totally contrary to what Wall Street said. My thinking was that companies could raise prices, consumers would increase buying to beat price increases, and that would exacerbate inflation.
I was correct in my prediction while Wall Street was wrong, as inflation and interest rates went to double digits.