WHY GOLD??????
In the 1970’s the gold markets telegraphed a clear message to all with eyes to see. The message was that gold and it’s sister precious metals are tracing out classic Elliott Waves with five waves up and three waves down. Perhaps the clearest and most obvious Elliott Waves ever seen in any markets in history. (A detailed explanation of Elliott Wave patterns is beyond the scope of this short essay. To learn more about this subject consult the book by Frost and Prechter Elliott Wave Principle – Key to Stock Market Profits.) The implication is that an investor’s dream is upon us. An investment vehicle whose future trajectory is highly predictable with incredible upside potential. A no-brainer!!!
Clearly the markets move in cycles. Whats more is that the general stock market moves counter cyclically to commodities. This makes sense since a weakening economy weakens the dollar which causes the value of goods to rise. Increasing commodity prices make production costs rise and manufacturing less profitable. As inflation is rising governments raise interest rates which is also bad for business, and the economy in general, causing an inflationary spiral. This is clearly seen in charts of the DOW/Gold ratio which show that long periods of a rising DOW stock market index are followed by periods when gold outperforms the DOW. It also shows that the next gold/commodities cycle has begun and the DOW up cycle has ended.
Notice in the first gold chart that during a gold bull cycle each successive peak is several times higher than the previous one. A geometric progression! It has often been said that an ounce of gold will always buy a mans suit. However a far more interesting and telling comparison is how much DOW an ounce of gold will buy. In the last gold bull cycle we saw the price of gold swing past the value of the DOW and we are probably about to see this phenomenon occur again in the upcoming years. Note that this implies that even if the DOW peaks at 14,000 and then retreats about 50% to only 7500, gold will peak at least above $7500USD! This just happens to be a multiple of about 25X it’s starting point near $300 in the current new bull market, a multiple that it also reached in the last great bull market of the 70’s when it went from $35 to $875!
Not only are the technical chart aspects clear but the fundamentals are too. In the 70’s the US economy was characterized by the fallout of massive war spending in Vietnam. The stock markets had peaked and were stagnating, the US dollar was plummeting and the buzz words were stagflation, peak oil, and energy crisis. The precious metals, oil, and other commodities, rocketed upwards to all time highs!
Well guess what! Today the US economy is characterized by massive war spending in Afghanistan and Iraq. A huge US trade imbalance is causing great concerns about the US economy. It has taken about seven years for American market indices to regain their position at the peak of the high tech bubble. The US dollar has plummeted. There are fears that a rebound in stocks may be near an end. Gold and oil and other commodities appear to have started a long term bull move upwards and there is talk of peak oil and an energy crisis! Déjà vu?!
HISTORY DOES NOT ALWAYS REPEAT – BUT IT OFTEN RHYMES (MARK TWAIN)