Analyzing the long term economic and market cycles, the probability is very high that the stock market downturn may eventually be the worst since the Great Depression. Of course, there are many more safety nets now, and the central banks of the world will coordinate in order to soften a decline. But the Fed and other central bankers are not the solution. They are the problem.
All the ‘safety nets’ have to be paid for with money the governments don’t have. Therefore, it will have to be financed with ‘money creation’ by their central banks.
That means the worse things get, the more money printing central banks will do. They will have to come up with better ways than the ‘quantitative easing’ of the last seven years. If they actually start throwing money from helicopters, as the Fed chair Ben Bernanke commented years ago, then central banks might be able to produce the elusive inflation that they have been trying to create. It will destroy paper currencies.
And that will eventually produce a rush to gold and silver and out of paper money. China has encouraged its citizens to hold gold, and probably has a plan to be the world’s largest holder of the metal.
Below is the long-term chart of gold back to 2001 when the bull market started. In 1981, I had written in the Wellington Letter that my work showed that a 20 year bear market was ahead. It was right on target, but at the time, no one believed that gold would decline for 20 years.
Furthermore, I wrote in 1981 that after a 20-year bear market, gold would go into a 30 year bull market. In 1981 that seemed outlandish. I even wrote at the time, “I have no idea what would cause a 30 year bull market in gold.” Now we know: all the central banks panicking and flooding the system, thus depreciating the purchasing power of our currency.
The year 2001 was the start of the bull market. Gold soared from about $250 to over $1900.
Then came a big market correction in 2011 to 2015. That retraced 50% of the prior rise, which is normal in a bull market. It’s very possible that the long term (secular) bull market has now resumed.
Let’s go to the Gold Miners ETF (GDX). There are numerous reasons for calling this bullish. Here are two: look at the strong increase in volume as prices soared the past week.
Then look at the MACD indicator at the bottom, which is now on a nice ‘buy’ signal. Any pullback now would be another buying opportunity. Asians see the financial crisis ahead and are fleeing to the one asset that has prevailed against currency upheavals for centuries: GOLD.
CONCLUSION: The preliminary evidence suggests that the secular (long term) bull market in gold is still intact and may be resuming now after a four year correction. The big investment money of the world is now much smarter than before the last crisis. Now money is going to US Treasuries, and Asians are going to gold. For hundreds of years gold has protected Asians against the inflationary policies of their own governments. The fear it may happen again.
The global banks are looking so bad, it suggests a major global banking crisis is ahead. On January 12, top officials in Japan were calling for an “emergency meeting” of top world financial figures to discuss what to do.
We have written that the central banks are out of ideas and out of ammunition. All they have left is talk about “we will do whatever needs to be done,” and all their other clichés. When banks are in trouble, many investors around the world go for gold.
Whereas the last crisis was triggered by the subprime mortgage crisis in the US, we now have the debt around the world starting to implode. There is no area of the globe that can rescue the others. A crash is possible because the markets are so illiquid that they cannot absorb major selling.
The past several months, the bearish sentiment on gold was at an extreme high. No one wanted it. When everyone is on one side of the fence, its usually smart to go to the other side. This could be the big surprise of 2016.
A word of caution: the precious metals are extremely volatile. Don’t be overexposed.
Wishing you successful investing,
Bert Dohmen, Founder
Dohmen Capital Research, Inc.