Silver Breaks Free
Silver has broken out and left its long-standing hold. Earlier I looked for silver to reach $3 to $500 in this surge. I dropped that target because prices could go higher than I first said. The surge is about to begin, coming out of a congestion zone, and there is no clear reason it must stop there.
Silver's chart matches gold's: it has broken out versus gold. Miners are now saying they will no longer stay undervalued.
Look at the numbers. In 1980 gold peaked at $850 and silver hit $50. Gold then fell into a bear market until 2002, ran up to $1,920, pulled back, and has now reached about $5,000 - repeated eight-fold bull moves from bear low to bull high. Silver stayed capped at $50, still below 50 as late as last November. That is strange. The main monetary metal keeps making big gains while silver sat stuck. After the November close silver finally moved. We issued a statement on silver at a "final bicycle" of $56. Within about 6 weeks it reached 120, and that is only the opening move.
The Base Metals Prove Silver Was Mispriced
Go back to 1980, a high area for many metals: copper, lead, zinc, aluminum, steel. Most now trade four to five times their 1980 levels. Copper is about 6.5 times its 1980 average of roughly a dollar, trading near 670. Gold is far above its $850 from 1980 and keeps climbing. Silver two weeks ago still traded in the 50s - only about $20 above its 1980 price, a trivial percent gain. That is an error.
When markets stay mispriced too long, the correction is sharp. The dot-com boom was a real coming reality, yet it still dropped 82% by 2002. When a price runs too far too long - from emotion, manipulation, or in silver's case a mysterious cap at $50 while everything else ran free - the snap-back is violent. Silver looks set to catch up fast, not slowly.
Gold's Upside and the Miners
If gold merely matches its two prior bull markets - 1976 to 1980 and 2001-2002 to 2011, both eight-fold gains - this bull run should reach $8,000 to $9,000, since it started below $1,050. Gold recently moved from about $4,600 toward higher levels. Matching those prior runs would put it far higher, and a government debt crisis argues against $8,000 stopping it.
Miners are set to double versus gold on a spread basis. That does not mean double in price, but relative to gold. With gold also rising, miners could triple or quadruple in price. Both miners and silver look set to run hard, and the next six months could be jaw-dropping.
Commodities Follow Gold This Time
Commodities usually do not track gold. If you study the CRB index or the Bloomberg Commodity Index against gold over past decades, they do not correlate consistently. They did in the late 1970s, when commodity inflation ran and gold soared while stocks were dead.
But gold and commodities can split for years before capital rotates. From 2015 to 2020 gold doubled, from a bear low of $1,050 to about $2,000. Over that same period the Bloomberg index kept falling, bottoming in 2020 under 60, far below its 2008 high of 235 (also cited as 237). The whole commodity group traded near or below 60 after peaking at 235. From there it had nowhere to go but up.
Oil Is Cheap Against Everything
Oil traded in the 60s and 70s for a couple of years and fell to 55 early this year. In January, at 65 and before the war started, we put out a buy signal, calling a bottom and a multi-year bull trend. Then headline chasers bought war news and drove West Texas Intermediate futures to 117. We warned that rally was too much, too fast, built on a passing headline, and buyers would get hurt. They did. About a month ago oil bottomed at 67, two dollars above the buy signal, and it now trades in the 80s. Oil will rise for reasons bigger than any news event.
Priced against gold over past decades, oil is dirt cheap - almost free by comparison. Divide WTI by the S&P going back decades and you see the same thing: relative to stocks, oil is about as cheap as it has ever been. Against the money supply and the falling dollar, it is off the page. By any of these relationships, oil stays dirt cheap even near $80 to $85. In 2022 oil sat at 130 to 140 and lingered there, so 85 is low against its own history.
Money Leaving Stocks and Bonds
The US stock market has run a bloated 16-year bubble. We are in a monetary crisis and a government debt crisis. Money is now going elsewhere. When the stock market wobbles - it does not need a 50% drop, just 10% to 20% off the high - capital will seek safer places. The old lesson was 60% stocks, 40% bonds. But Treasuries may no longer be that refuge. The CIO of Morgan Stanley said about 6 months ago that 60/40 no longer works, and 60% stocks, 20% gold, 20% bonds is the right direction. Once T-bonds are not a real choice, the money left goes to monetary metals and commodities. That is where to be for the next couple of years.
Smart money has already begun moving into commodities. Last October, before the January crude buy, Bloomberg was 107 and we called the next major leg up. It has since roughly doubled to the 140 area with no headlines. That rally was led by the broad index, not oil - Bloomberg bottomed in October, crude did not join until January.
Broader commodity participation is showing: not just oil, but grains, sugar, and cotton, all charting higher together.
Crash or Rotation?
A crash, by the standard used after studying 1929, 1987, and October 2008, is a drop of over 30% in a matter of weeks. October 2008 came a full year off the market high and ran 30% to 35% in several weeks. A 20% drop is only a correction, not a crash. I see a major top and a major decline coming, but not crash levels yet. The bigger warning is rotation - capital can leave stocks without a crash. Expect double-digit percent downdrafts, likely starting in the S&P in the fourth quarter, as the crowd senses more risk than reward and moves out. Deeper levels next year could bring a true crash event.
Gold Does Not Have to Fall With Stocks
A stock crash does not force gold down. In the 1987 crash gold was rising but not in a dynamic bull. The S&P fell about 35% in a couple of days, yet gold rose 7% that month. In October 2008 the market, a full year off its high, finally broke, and gold - up for a couple of years - took its own correction and had a bad month, but was back to its highs within months while stocks kept falling until March 2009. People remember that one in-sync drop and wrongly assume it happens every time.
With bonds no longer a real alternative, there is only one place to go. If the S&P has a crash month in the next six months to a year, gold could explode that same month.
Money Printing Fuels Gold
When a monetary and debt crisis hits, the Fed prints to keep its own house from burning down. That degrades the money unit and fuels gold. The M2 money supply chart shows they are printing again - an upward curve you want to own.
Currency debasement hides in nominal prices. A house that cost 4,500 for a grandfather, 45,000 for a father, and 450,000 today shows the money unit shrinking. The S&P has risen from 2000 to the present, over 25 years, by about the same amount as the money supply - so in real terms you have not really made money. US average home prices were roughly flat until about 1971, then took off. Rising asset prices can mask a currency losing its purchasing power. If policymakers meet debt stress with more liquidity, nominal gains say little about real wealth. A portfolio can rise while its true buying power quietly falls.
