Gold: a four-fold move, not a finished one
Annual momentum turned bearish on gold in 2012, three months after its September 2011 high. After the first small drop, the signal flipped. Gold went sideways for a year, then collapsed, cut almost exactly in half, from 1920 down to near 1050.
The recent break up top looks savage on a percentage scale but is minor on a logarithmic ratio scale. Plotting price as a ratio, going back to 1975-76 when gold was legalized, is the fair method for a market that was once a hundred dollars and now trades in the thousands. A point scale distorts it.
Two prior bull markets each ran eight-fold from bear low to bull high: 1976 to 1980, and 2002 to 2011. The current advance off the 1050 low has reached only four-fold - half the size of each prior bull. On a ratio scale the recent correction barely shows. The move so far is not parabolic. Matching the two earlier eight-fold moves would put gold at $8,000 to $9,000.
The debt crisis as the driver
The context is a bond market crisis across the western world, including Japan. Yields are exploding in Europe, the UK, and the US. This is a government debt crisis in the major economies, not some small country like Guinea - the first such crisis basically since the Federal Reserve was created. Authorities will try to put that fire out.
This is different from a mortgage crisis, private debt, or the dot-com bubble. The threat is a stock market collapse and falling paper assets driven by doubt about paper assets, with government debt as the prime concern. Governments can suppress private-sector damage, but sovereign debt problems force currency and liquidity decisions, which historically push money into monetary metals. Gold has much further to run, and silver and miners will lead it strongly.
Silver: badly lagging everything else
On a ratio scale, silver traded inside a rectangle from 1980 through 2011 - from a low near $5 to a high around $50, a ten-fold range. A ten-fold move off the old $50 high implies roughly $500.
Compare silver to base metals versus their 1980 prices. Every base metal is about four to six times its 1980 level. Copper averaged about $1 then and is now pushing toward $7. Gold was 850 in 1980 and is now 4500, well above its old high. Silver sits only about 15 cents above its 50-year range high. Silver has run a supply-demand deficit for six years, yet stays stuck near its old range. The market may be repricing silver late, not finishing its move.
The recent surge that most people called the top was simply silver climbing out of the hole to rejoin reality. The pullback damages no long-term metric; it is an intermediate sharp correction. On a daily chart, most of the drop happened in the first two days, which is strange. The first wave low was 6390, actually below where price sits now. Each later low took out the prior low only slightly. Every time it made a new low, someone bought it and it did not collapse.
Structure points to a completed correction
The correction is a three-wave process: lows near 6390, then 6161, then 5500, with price now back around 6470 - above three of those lows. On momentum, the third wave did not break below the second wave low even though price did, giving a non-confirmation. Third wave is all you get.
The upturn that began August 5th marked gold, silver, and miners turning up together. This rally should eventually exceed the two prior rally highs since the peak, even though it has only moved incrementally so far. When the next move comes, silver will beat gold and miners will beat gold - both better places to be.
Money supply and the rotation
The money supply has grown almost 50% since COVID. When money supply grows decade by decade, the printed money has to go somewhere, through rotation. Since 2009 it went into stocks: QE began in November 2008, a year after the October 2008 crash a year off the market high, then the COVID response pushed the pedal to the floor again.
Now the debt market is in total doubt - a nuclear event. That market is bigger than the stock market and will take enormous money to save. Even if authorities keep bond prices up and yields down, doing so will have effects. A favored bubble can run 10, 16, or 17 years while other categories stay overlooked.
The Bloomberg Commodity Index is a good, well-weighted broad commodity gauge, not too heavy on energy. Its 2008 peak was about 235; it now sits near 146, only about halfway back. Eighteen years of money supply inflation has not shown up in commodities - the market was overlooked while money flowed into stocks.
Now there is a stock market bubble on the edge of a major downturn, likely showing up in the fourth quarter. Punch a hole in one bubble and the money moves elsewhere; it does not all burn up. The normal refuge is T-bonds, but that is not working anymore.
Bonds lose their safe-haven role
Morgan Stanley said about six months ago the old 60/40 portfolio is now 60/20/20, with 20% gold - but the bond market looks poor. The public and many governments have lost interest in US government bonds. What is left is commodities and gold.
This replicates the late 1970s. The Fed raised rates hard, up to 14% from single digits, yet gold exploded from a low of 103 in 1976 to 850 in 1980, and commodities exploded the whole time. So higher rates alone cannot invalidate metals. Anyone who thinks another rate hike is bad for gold and silver should bet the other way. Gold is now the prime alternative, along with silver, monetary-metals miners, and the broad commodity complex.
The commodity breakout
The Bloomberg index turned major bullish on annual momentum in April 2020, with a buy signal at 70; it doubled to about 140, which is still cheap against the 235 old high. It then pulled back for a year after the Ukraine war started, went lethargic for about two years either side of 100, and in October last year at 107 approached the top of that base. That signaled the next leg, and it broke out.
The index took out the 2022 high, pulled back, and is now making higher highs - its second major upwave, likely a good place for the next couple of years. This translates into commodity-related stocks: oil-sector stocks and ETFs (such as XLE), base-metal miners, and things not tied to gold and silver. From 2015 to 2020 commodities fell while gold doubled, so they were out of sync; now the Bloomberg is back in sync with gold and silver. It is a cheap category that has shown it will not go lower, and price now points up.
Commodities should not explode or match gold and silver, but should be a comfortable place for the next couple of years as money moves out of paper bubbles into cheap assets with upside.
The 16-year channel
The index formed a cup-and-handle pattern and just broke out. A channel drawn from the low after the 2008 high connects three successive lows - the channel bottom. Moving that channel up to the 2022 rally high at the same angle of descent makes a parallel channel, and that upper line stopped the 2022 rally high and even caught support for the handle.
It is a 16 to 18-year channel defined by five pivotal points - three lows and two highs - now broken out, retested, and pushing to new highs. Measuring the channel's thickness projects a move back to the 2008 high at 235 and beyond. The launch just began. The driver is central-bank liquidity moving from vulnerable T-bonds and stocks into commodities, which do not look vulnerable.
Oil is not favored over other commodities - it is a laggard to the Bloomberg. The index broke out of its channel before oil even turned up, so the rotation is broader than energy. Investors should watch structure and participation, not just red candles, and prepare for rotation before headlines confirm it, because late recognition usually means paying higher prices.
