By John Reizner |
May one attempt to forecast the long term future dynamic of the economy by examining the nascent or long term price breakouts (sometimes measured in multi-decade patterns) of economically important sectors of equities or commodities such as the gold and oil markets and to project forward further significant long term price progress in the group?
May one project the future dynamic of the U.S. economy from the current price behavior of commodities or equities sectors whose price performance is affected by economic activity relevant to their underlying businesses? The stock market has long been thought of as an economic forecasting tool, however imperfect it may be at that task.
If gold decisively breaks a long term technical downtrend measured in decades, then may one project forward from that price breakout behavior a decisive change in U.S. economic or political dynamics that a secular bull market in gold represents?
Permit me to use the history of my own personal experience and analysis of both the physical gold market and the oil equity sector to illustrate this concept.
The economic and political events of the 1970's in the U.S. left an indelible image on many of the youth of that generation. I was studying economics in college during that time, while nurturing my interest in investing in equities. The 1970's has been called a pessimistic decade by some, marked by the unpopular Vietnam War and economically broken up by the quite severe recession of 1973-1974; the Dow Jones Industrial Average fell below 600 in 1974, marking the low of a lifetime and a wonderful long term buying opportunity for equities.
I also witnessed the double digit inflation (or stagflation) and interest rates of the latter part of the 1970's. I watched with amazement as the gold market traveled to its zenith of $850 in 1980 and oil topped out at $40 per barrel as the second oil shock occurred in 1979-80. Many commentators at the time thought that we would then enter hyperinflation. The gold market subsequently fell into an almost twenty year bear market as Federal Reserve Chairman Paul Volcker squeezed inflation out of the system through a restrictive monetary policy. Crude oil hit $10 per barrel in 1986.
Fast forward to 2003: I noted a long term breakout of gold on the monthly chart and made the inference from that price behavior that the U. S. economy could be potentially headed for a similar economic dynamic as the 1970's, complete with elevated inflation, gold and oil price levels. At the least in 2003, I projected a potential continuation of what I believed to be secular bull market for gold bullion similar in form to the bull market from 1970-1980.
I later made the case on this website in several articles and blog entries (see gold and silver investing categories) that this bull market for gold and oil was potentially no ordinary cyclical or short term uptrend, but a secular or long term one for the gold and oil markets. In fact gold has run from below $400 per ounce range in 2003 to its current market price of $1431.10 per ounce on March 5, 2011. Oil is only now moving past the $100 per barrel mark for the first time since the commodity collapsed from its high of $140 per barrel in July 2008.
I bought gold bullion bars and gold coins starting in 2003. Much later I bought silver bars. I continued to hold my largest equity position, which is a major integrated international oil firm, among other equities.
Commodity price pressures are now manifesting themselves today especially in worldwide food price inflation, felt acutely by the citizens of developing economies. It appears that the food price surges in many developing countries (particularly in the Middle East) have made many of these counties citizens day to day survival quite difficult. In some Middle Eastern autocratic regimes, a new outspoken generation is demanding more freedom from their rulers than their rulers may be willing to give. Thus the current violence in Libya (which has disrupted oil exports from that country) and protests in Bahrain and Saudi Arabia have propelled the oil, gold and silver markets and their associated stock sectors upward.
In our own country, the recent upward pressure in oil prices is producing rising gasoline prices affecting the already strained pocketbooks of consumers. However, the oil equities sector is benefiting from the currently strong prices of the underlying commodity. In addition, gold and silver bullion and the miners are currently surging strongly higher at the moment.
Was a future long term bull market in gold telegraphed by the bullish breakout by the yellow metal on the monthly chart as I described in 2003? That's the importance I gave the breakout. Did this further forecast at the time that our economy may experience some of the problems normally associated with and witnessed by many in the past accompanied by a secular upward trajectory in the gold market price: potential high inflation, economic upheaval, or even war? I am not sure that I have the complete answer to the latter question. But In my own work, I placed great significance on the long term breakout and have written about my projections about the economy, gold, oil and political issues as well as a variety of other topics on this website.
Gold bullion has been in long bull market lasting over ten years. Now silver is joining the party, and may represent a greater opportunity in the longer term. The only thing that I can say is much of the easy money may already been made - we may be firmly in the "optimistic" stage in my opinion, as legendary investor John Templeton defined the various stages of a bull market. Now we may just have to wait for the market "euphoria" accompanied by investor and public hysteria over gold and silver investing accompanied by further price progress - a euphoria that may be building now.
Fundamentally, this may be caused by a number of catalysts: the Federal Reserve embarking on a QE3, an unaddressed Federal debt burden potentially resulting in highly elevated domestic inflation level or an "unmanaged decline of the U.S. dollar. Additionally should China stop supporting our Treasury market, the Federal Reserve might continue or restart QE to pick up the slack, which could under that potential scenario escalate the level of demand for gold and silver as the public witnesses sharply escalating price levels and turn to a recognized store of value in order to protect their purchasing power. The Federal Reserve is committed to modest inflation of 2% (engineering that is a different story). That target might be exceeded if the velocity of money increases, bank lending to creditworthy companies quickens or should economic activity pick up. Then the much talked about Bernanke exit strategy may come into play.
I believe that we still have time to put our house in order. Yet, we may need a different President or have to undergo another economic crisis in the future to spur an environment where long lasting economic growth and meaningful debt reduction can occur. Time is limited: hopefully citizens and lawmakers may take the opportunity soon to have a national dialogue in 2011 on important economic issues as debt reduction and maintaining a sound currency as we are all in this together.
The Dow Jones Industrial Average currently rests at 12,169.88 while the S&P 500 closed at 1321.15 as of this writing. Gold trades at $1431.10 per troy ounce while silver trades at $35.60 per ounce. Crude oil is at $101.91 per barrel.
Technically, silver appears to have the most potential for gains in the next couple of years, though my work shows that if it reaches the $38 - $42 range, the time may be ripe for a correction in the range of 24% to 50% from that high range before it potentially reverses again and may exceed the previous high over time.
I am maintaining my core gold or silver bullion positions at this time as well as positions in a silver miner and ETF. The fundamentals behind the continued upward price movement in these markets are in my opinion still formidable: (i) the Federal Reserve has said that quantitative easing (QE2) may continue at least until June, and (ii) neither party in Congress nor the President at this time and for that matter many members of the public appear to desire to sit down and seriously discuss the need to downsize federal spending and government to a degree that it would meaningfully reduce our debt burden and contain inflationary federal stimulus (we currently have QE2 to counteract many potential economic effects of cuts in government spending).
For the time being, I have a strong allocation to U.S. equities, but am monitoring carefully whether or not the succession of higher lows and higher highs in the S&P 500, NASDAQ Composite, and the Russell 2000 on the daily chart will continue. Should that uptrend be violated, I would look for the indexes to maintain strong support at the indexes 50 day simple moving average range. Should the latter range be violated on higher volume, I would look for potential opportunity to realize past gains and reduce risk. My technical studies appear to indicate that the S&P 500 may have further up to go, but a stronger case may be made for greater upside progress if we penetrate the 1335-1356 resistance area on the S&P. The Nasdaq Composite and the Russell 2000 indexes appear to me in better shape technically than the large cap indexes - which has occurred in the past in the more speculative stage of a stock market advance.
I believe that the stock market low of S&P 666 that we witnessed in March 2009 may have been a low of similar importance as 1974 and may have represented a stellar buying opportunity for the long term. Just remember the after the stock market low in 1974, the stock market struggled for years after the initial market recovery and the economy experienced two more deep recessions punctuated by the 1980 oil shock (also the gold top) before finally the stock market lifted off in August 1982 for an 18 year long bull thrall. We may very well in the next several years be in store for another recession. No one that I know of has repealed the business cycle yet. What ammunition may the Federal Reserve have left to fight this inevitability, especially after the Fed's extensive response to the 2008 debacle, or if Americans and their leaders do not face our mutual debt burden in a timely manner?
Just as the breakout in gold on a long term monthly chart may have telegraphed further upside price progress in the yellow metal on a secular basis, the U.S. stock market has been interpreted and publicized by some as a recession forecasting tool. However, the stock market has a mixed history at predicting such events. Looking at economically important commodities and their associated equity sectors price behavior may render clues not only regarding the potential future price progress of the commodity or sector, but may render insights into future economic dynamics.