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Silver, Gold, Stocks, and Bonds are Transitioning

Nothing is certain but death, taxes, central bank intrusions, market corrections and High-Frequency-Trading (HFT).

Short-term moves are dominated by HFT computers, news (real or not), and central bank created liquidity.

This article examines long-term trends.

SILVER:

Silver prices move farther and faster than gold prices, both up and down. At the beginning of long term rallies silver often lags gold, as is the case in early 2018. The gold to silver ratio at eighty to one is high. Fifty-nine to one has been the average for 40 years. Prior to 1913 the average was about 15 to one.

An eighty to one ratio indicates prices for gold and particularly for silver are too low. At silver price peaks the ratio will drop to thirty or even fifteen to one. The highest ratio was about one hundred to one in 1991, a multi-decade low.

The silver to gold ratio (inverse of the gold to silver ratio) is a good indicator of silver price lows. Examine the following graph. The ratio sits at a long-term low in early 2018. The five other lows in the past 30 years have been good times to buy silver.

 

 

The silver price (times 1000) ratio to the DOW shows that silver prices are relatively low. The DOW recently made an all-time high at 4.1 times larger than its low in early 2009. The next major moves should be silver prices up and the DOW down.

Silver prices bottomed in late 2015 and have built a base since then. A reverse “head-and-shoulders” pattern is a good indication of a long-term bottom.

Long-term silver cycles show silver price lows in 2001, 2008, and 2015 – about every seven years. If this cycle holds, expect higher prices into early next decade.

CONCLUSIONS – SILVER:

Silver prices are low compared to gold, the DOW, and official national debt (not shown). Yes, silver prices are over four times higher than their 2001 low at $4.01, but prices for the NASDAQ and DOW are similarly higher. National debt is 3.6 times higher than in 2001. Debt based fiat currencies are always printed in excess. Prices inevitably rise when measured in devalued currency units.

National debt doubles every eight to nine years. President Trump likes lower taxes, higher debt, more wars and a weaker dollar. Debt will accelerate higher and prices for silver, gold, food and energy will rise.

The silver to gold ratio indicates that silver prices are low compared to gold. Expect much higher silver prices in the next several years. Long-term silver cycles support that conclusion.

GOLD:

Gold prices will rise along with silver prices. Because the silver to gold ratio is low, silver prices will rise farther and more rapidly toward the end of the rally. Gold has built a base similar to silver.

James Rickards and others have made a reasonable case for gold prices at $10,000 next decade. My book, “Buy Gold, Save Gold” argues for these gold prices based on out-of-control spending, ever-increasing debt, and massive creation of digital currency units.

GOLD MINING STOCKS:

Gold mining stocks (XAU Index) have been weak since late 2010. Since then the XAU is down over 80%. The ratio of the XAU to gold shows the relative strength of the mining stocks to gold.

The XAU index bottomed in January 2016 and has risen since then, along with gold. When gold breaks above its 2016 high the mining stocks will fly much higher. The graph shows the XAU to gold ratio is on the verge of breaking out of a two decade decline. 2018 should be the year when the mining stocks correct their long decline. When they move higher, expect volatility, huge moves and large corrections.

Stock Indices:

The DOW, NASDAQ 100 and S&P 500 Index have risen in near vertical moves. Such parabolic moves are unsustainable, but the corrections or crashes are difficult to predict.

You can depend upon:

  • Parabolic moves always correct, usually in a crash. Think Bitcoin in December 2017.
  • Wall Street will sell the story that “this time is different.” Question that story.
  • The Fed does not want a stock market, bond market, or dollar crash.
  • The Fed cannot protect all three – stocks, bonds and the dollar.
  • Something will get sacrificed. The dollar and stocks come to mind.

The DOW is high and has not suffered a large correction since 2008. The monthly Relative Strength Index (14 period RSI) reached its highest level in history (116 years) last month. This is indicative, but not a guarantee, of a long-term peak in market prices. We shall see.

The chart of the NASDAQ 100 is similar to the DOW. The monthly RSI reached its highest level since the 2000 crash. The NASDAQ 100 fell 84% from top to bottom after the 2000 crash. It could happen again, especially since debt and leverage are much larger than in 2000. It is a mistake to assume “this time is different” and “the Fed will make sure a crash doesn’t happen.”

The DOW corrected over 10% from its late January high and has since risen well off its lows. The media story suggests the correction is over and the DOW is headed much higher. Wall Street sells that narrative and analysts are issuing buy signals. Everything is great, unemployment and inflation are low, the Fed Put is working, and new all-time highs are coming. Maybe Not!

Blame for the recent stock market sell-off was assigned to the bond market and rising rates. Examine the rise in 10-Year rates since mid-2016.

Interest rates are rising and housing sales are weak, as expected. The $70 trillion of U.S. debt is more expensive to service, which hurts corporate profits and individual disposal income.

Bond prices have risen since the early 1980s and interest rates have fallen during that time. Not everyone believes that interest rates have bottomed, but the charts indicate higher rates are coming.

CONCLUSIONS – MARKETS ARE TRANSITIONING:

  • Silver prices are low compared to the DOW and gold per the above graphs. Other ratios also indicate silver is under-valued.

 

  • Both silver and gold bottomed in December 2015 and have built a bullish base with a reverse head-and-shoulders pattern. Expect much higher prices into next decade as they transition into a roaring bull market.

 

  • Gold mining stocks (the XAU) are low compared to gold prices. Their rally should be substantial. The XAU to gold ratio shows that mining stocks are ready to break-out higher.

 

  • Stock Indices – the DOW, NASDAQ 100 and S&P 500 – have reached all-time highs, corrected, and rallied. They might rise further into new all-time highs or correct/crash again. If they transition lower, the fall is likely to be steep and severe, based on excessive leverage and margin debt.

 

  • My expectation is stocks will fall, but central bank liquidity injections and HFT are powerful forces levitating the stock markets. However those forces have not kept interest rates from rising, nor did they prevent an 84% collapse in the NASDAQ 100 after the 2000 peak, nor a crash in the S&P 500 in 2008.

 

  • Bonds have transitioned from a 35 year bull market into a long-term bear market. Interest rates have risen for 19 months, yet remain low compared to historical norms.

 

  • This year should be a transition year to higher silver, gold and commodity prices, a lower dollar, lower stock indices, and higher interest rates. We shall see!

 

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By | 2018-03-02T01:07:17+00:00 March 2nd, 2018|Gold & Silver Commentary|

About the Author:

Gary Christenson is the owner and writer for the popular and contrarian investment site Deviant Investor and the author of several books, including “Fort Knox Down!” and “Gold Value and Gold Prices 1971 – 2021.” He is a retired accountant and business manager with 30 years of experience studying markets, investing, and trading. He writes about investing, gold, silver, the economy, and central banking. Many years ago he did graduate work in physics (all but dissertation), so he strongly believes in analysis, objective facts, and rational decisions based on hard data.