Via email from Tom McClellan, please consider Gold's 8-Year Cycle.
We are now entering the upward phase of gold’s 8-year cycle, and that should bring some fun gains. And this comes at a time when gold has not been getting much of investors’ attention. If gold stays flat for a year, and Bitcoin twinkles to get all of the attention, speculators eventually drift away from gold. That sets up a great opportunity for gold to start getting more attention, and more money thrown its way.
As with most market cycles, gold’s 8-year cycle is measured bottom-to-bottom. But there is more to it than just that 8-year period between major bottoms. It typically sees a 3-year upward phase, which is where most of the big gains are seen. Then the 5-year downward phase actually has a 3-wave process of going down.
This has been evident since shortly after gold started trading freely in 1975. The cycle was probably lurking out in the wild, but it was just not evident with the Treasury department fixing gold prices prior to the 1970s. The 3-up, 5-down pattern saw one anomaly in the 2000s, when prices were mostly up all the time during that cycle. But if you look hard enough, you can see the inflection points of the 3-wave down move within that upward trend.
Now that we are in the 2010s, the pattern appears to have returned to its normal 3-year up, 5-year down phase, and reset for the next 3-year up phase. So why has gold not started screaming higher already?
My answer is that there is another independent cycle also at work that has kept gold price down in late 2017, and that is the 13-1/2 month cycle.
This cycle is also a bit unusual, in that it usually contains a mid-cycle low about halfway between major cycle lows. And as I discussed back in September, it is a bullish message to see “right translation” in the last cycle.
That term means that the price high after the mid-cycle low is higher than the one before it. Seeing right translation means that prices should not go down to exceed the prior major cycle low, and that they should do well in at least the first part of the next cycle, which is starting right about now. We saw “left translation” in the 13-1/2 month cycle from 2011 to 2014, as gold prices were in a protracted downtrend during the 8-year cycle’s descending phase.
As we head into early 2018, we have both the 8-year cycle and the 13-1/2 month cycle in their ascending phases. That means both horses are pulling in the same direction, and it should mean good things for gold prices especially in the first half of the year.
Fundamentals and Cycles in Alignment
Some people believe in cycles and others don't. Here are some other points to consider.
- Fundamentally, sentiment in gold is washed out. Few want it, even as a hedge even though gold had its best year this year since 2010.
- The media is touting Bitcoin as "the new gold" despite the fact the comparison is mostly ludicrous.
- Investors are chasing FAANG (Facebook, Apple, Amazon, Netflix, and Google as if valuations no longer matter). A market realignment is going to happen.
- Every week we see reports on why stock are cheap compared to bonds, and analogy that makes a much sense as Bitcoin is cheap compared to moon rocks.
- The US tax cuts will add a minimum of $1 trillion to national debt in the next 10 years. I expect triple that.
- If US interest rates do not rise as most expect, faith in central banks will again come into play.
- If there is a crisis in the Eurozone (Italy, Germany, or Spain are likely places), faith in the ECB will come into question.
- Already we are seeing yields rise in Italy vs. Germany.
- Despite analysis that suggests the US economy is strengthening, yields on the long end are not going up. The yield curve is flattening.
- The US treasury market does not believe in economic strength, and neither do I.
Faith in Central Banks
Points five through 10 pertain to faith in central banks. This is how I view things.
I did not post that on a log chart, but events line up as per McClellan's 8-year cycle.
ECB president Mario Draghi nearly timed the top of the gold market with his now famous "I will do whatever it takes to save the euro, and believe me, it will be enough".
What did he do at the time? Actually nothing. His speech was all it took. Later he added QE that is doomed to fail.
Fundamentally, we are lined up on numerous fronts for faith in central banks to come increasingly under pressure.
- Consumers are under increasing pressure to pay debts (see Paying Down Christmas Debt: How Long Will It Take).
- Houses are well beyond affordable.
- The auto sector is holding up only because of hurricane replacement.
- And US debt is out of control (See Debt to GDP: Only 4 Major Countries Worse Off Than the US ).
- A recession was only staved off by multiple iterations of QE. Another recession is overdue by many measures.
- The stock market is in a bubble of epic proportion. Median PEs are the highest in history. For discussion, please see Oppenheimer Predicts PE Expansion, Most Bullish S&P Forecast Yet .
It will not take much of anything to trigger loss in faith in central banks. The equity bubble bursting is a likely candidate. A currency crisis is another.
For those who believe in cycles, the timing is perfect for a strong runup in gold.
How Much Gold?
Mike "Mish" Shedlock