Martin Armstrong's Tense

Hello again.
I read Martin Armstrong's blog every day. Much as I grimace at his spelling and grammar standards, I do enjoy his insights and his passion about the world's troubles and what lies ahead. I recognise that he's running a business, and has some 'product' to sell, so a pinch of salt is sometimes required, but in my view he's forgotten more about the markets, the world and its history, and cycles, than most of us will ever know, and that includes all of the so-called experts and amateurs that write at length online these days.
So, I was interested in a paragraph he wrote very recently regarding one of my favourite assets: gold.
Here's the paragraph to which I refer:
Gold has been turning back down as it has lost much of its luster among broader base investors. In fact, there are people now starting to say gold is dead since it has declined in the face of monetization by the Fed and the ECB. The wider view is the gold rally was all hype and it will never rally. This too is what I warned MUST take place BEFORE you get the low. We had to “shake the tree” and get them all out.
Mr Armstrong has been vociferous in recent years in his criticisms of the 'gold promoters' out there, who fail to appreciate how the gold price moves in line with short and longer-term cycles. He produced a timing report on the precious metals last year (I think) and sold this to anyone interested, and it contained his system's key turning points for prices, and he made it clear that lower prices were ahead for much of the past few years. A good call for sure. More recently he has appeared to soften his tone towards gold somewhat.
I happened to notice one key word in the section I have copied above:
'This too is what I warned MUST take place BEFORE you get the low. We had to “shake the tree” and get them all out.'
Unusually, he has switched from using the present or future tense to using the past tense in relation to ridding the market of the short-term bull players and allowing a bottom in price to form (now do you see what a great play on words this blog title is?).
So, I wonder, is the gold price past its lows? Are we in a new stealth bull market already, but no one has noticed? Time will tell, but like many of you reading this who have bought more gold recently, I reckon the past 2 years will turn out to have been one of the great buying opportunities we shall ever see for any asset class during our lifetimes.
If the long-term interest rate and inflation cycles turn in due course (next year or two, after a deflationary scare), then another gold-related asset (its miners) could also be set for a spectacular 20 years or so. Have a look at this long-term Barron's Gold Mining Index chart, which I have split into (fairly rough) sections. Sadly the BGMI chart doesn't go back quite as far as I would like, so we have to make do with what we have, but it would seem that for the period following the Great Depression, right through until inflation/recessions started to appear in the mid 1960s, the gold miners did very little. Then from 1965 until 1982, the miners had a huge run, along with gold, both up by around 2400%.
It seems inevitable to me that the 32 year interest rate cycle will turn within a couple of years, and we'll be back in a period much like the 1970s, with rolling currency crises, very little real growth, and a lack of faith in central banks or governments to do much about it (at last). So, interest rates will rise, asset prices will rise as money seeks something real as a hedge, and as we saw in the 70s, gold and its miners could be the best investment to hold for the long run. If gold rises to c. $2,500 through the end of the current cycle, and then does another 2400% run in the following 16-18 years, you'd be looking at a gold price of $60,000 an ounce. And of course a very similar rise in the share price of its miners, just like in the 65-82 period. Then, in 2034, it would perhaps be time to move away from gold? Ah, who cares, I'll be an old man by then, we'll review it all again nearer the time.
In closing, I had an interesting chat last year whilst on holiday with a geologist who works for a multi-billion dollar family office (brewing wealth), and they'd just completed on a tiny £100 million deal to buy a gold mine in Africa (I forget the country). I asked her what would be the likely situation with the mine if the gold price were to experience a sustained and significant price increase over a number of years, were they worried about the local government repossessing the mine? She explained that these days most mining deals have a profit-sharing clause to take care of that, so everyone gains on the upside, but the capital risk is solely with the investor if prices fall. The deal, interestingly, was part-funded by Kuwaiti investors.
Good luck.
Edit (24/5/15)
I had an email from Nick Laird (Sharelynx.com) today. He has kindly put together a longer-term version of his BGMI chart shown above. The chart below uses Homestake Mining from 1890 through to 1925 & then Homestake & Dome through to 1938, when it joins the BGMI index until 1945, when it then joins the SP Gold index. Thanks Nick.
Here's the chart:
The chart proved my earlier guess, that after the 1933 dollar devaluation against gold, the miners entered a long period of consolidation, from 1933 through to 1965. But they delivered a quick 1000% gain from around 1925 through to 1933.
It is apparent that the 'gold recapitalisation' period was twice as long in the 60s-70s, with a gain in gold and its miners that was more than twice as large as in the 30s. Does that offer any clues for what lies ahead in the 2020s-2030s? The world's debt bubble hasn't got any smaller has it? We will see in due course.

14 comments:

Grumps LaBastard said...

That's the chart I've had my eye on as well. The HUI pullback since 2011 will look like background noise decades from now. It's interesting how every quantum leap on the chart corresponds to a Kondratieff Winter or Summer.

I've suspected we've started a stealth bull since November 5th. The HUI consistently makes higher lows, gold in USD brushes off any strength in the DXY, and gold in AUD, Loonie, Euro, Yen, Real, Pounds, Rupees,Indo Ringgits, Mexican Peso, Swedish Krona,Norwegian Krona, and Rands is in bull markets.

Anybody notice Newcrest? Everybody thought it was dead in early November at 8 bucks. It has almost doubled since then with a mere 150 AUD upswing in the gold price.

And I wouldn't worry too much about expropriation. China money has been moving into various gold miners. Any country that wants to participate in the AIIB, NDB, Silk Road/Maritime Route or have any kind of access to the Chinese financial sphere will have to play ball. China will not take kindly to countries expropriating Chinese assets. I wouldn't be surprised to see Greece soften its stance on the Eldorado property after Russia/China white knight it.

Gary, what about the poor FOFOAtards? They're going to be left behind. No silver outsized gains, no special miner dividends on top of outsized miner gains, and a crummy 28% cap gain tax on bullion. And when every other asset is at generational bottoms when priced in gold, the F'tards will do nothing, fantasizing gold will forever hold its purchasing power, even outperforming bonds and CDs with a real positive rate.

Slow Loris said...

Gary:

If you do your historical research, I think you will discover that after Roosevelt increased the official US price of gold to $35 per ounce, many US gold miners did wonderfully well until WW II changed so many things.

Slow Loris Larry

Gary said...

Hello Grumps,

I'm not worried about expropriations, but I have much more in physical gold than the miners, it's a safer bet IMO as I head towards retirement during the next 10 years.

It's all cycles in my opinion, and I'll certainly be looking to slice off golden profits and divert them into other cheap assets along the way. We all must make own decisions of course.

Hello Slow Loris Larry,

It was a hastily put together post last night, so I didn't have time to delve back into the 30s data. I reckon that 1933 to 1965 was, overall, a global growth cycle, and hence gold/miners were range bound, albeit with several periods of outsized gains, much like 1982 to date. WW2 of course was highly stimulative, as Roosevelt and his cronies knew full well. Will we avoid a WW3 before 2034?

Grumps LaBastard said...

I recommend to listening to any of the Bob Hoye interviews on Goldseek. He talks about the real price of gold and why investors really should use the miners as a vehicle to play a gold move during a post-bubble contraction. He says owning bullion is just a currency play.

I don't have the charts in front of me now, but i would guess that WWII started commodity inflation upwards, hereby lowering the real price of gold. Costs of gold mining probably went up.

AdvocatusDiaboli said...

good morning Gary,

1.) "definition of a mine: a hole in the ground owned by a liar." - Mark Twain

2.) Above was the simple version of the greater fool play (that obviously some people here hope for), here the detailed one: I wonder why people think that owning gold stocks gives them some additional leverage on physical gold. No it does not. It is more the opposite: When buying into gold miners you technically sell gold (naked) short.
Just think of it: You give paper savings aka capital, so that your newly owned company sells new additional gold into the market. There are only two possible outcomes: Your company will either sell above or below production costs. If it is below, you are suppressing the price of gold by burning your very own money/capital. If it is above production price, you get back some paper. Great for you. What can you do with that fiat dividends? Buy gold that the mine just released to the market? How much of that gold? Exactly, it will buy you less gold than it has released (minus production costs). So even in that case with receiving the fiat, you are actually in total SHORT gold.
But there is not just the production price, there is also the price competition of other miners out there. So either your mine offers it for more or less than the competition. If more, you loose. If less, your mine will drive down the price of the other mines, limiting and cutting your own profit.
So either way, you lose on the assumption that gold stocks are an addional leverage on your physical gold stash. It is just a stupid losing game.
Greets, AD

P.S.
I left out the other real life aspect: Some crooks like Peter Munk playing games on you shareholders in the meantime, or who do you think is smarter, you little shrimpy gold stock holder?

Gary said...

Miners should outperform gold over this next brief deflationary cycle, as the benefits of cheap oil and a rising gold price appear.

In a longer - term inflationary cycle, it's likely to be gold that outperforms, unless the oil price rises at a slower rate, which is possible.

Either way an investor should be satisfied.

AdvocatusDiaboli said...

good luck with your "I am an shrimpy shoe-shine-goldseek wanna-be rich investor".

Amazingly over the last fifteen years, almost one of the biggest bullruns for physical gold over a century, still most miners did not perform. Haven't you ever tried to figure out why?

Gary said...

AD, I'm 98% gold, 2% miners, so thanks for your good wishes.

The past 15 years to date...nothing special for gold, miners are lagging currently, but my view is they'll outperform over a deflationary cycle.

ssgtrader said...

If the long-term interest rate and inflation cycles turn in due course (next year or two, after a deflationary scare), then another gold-related asset (its miners) could also be set for a spectacular 20 years or so,

In my mind the above statement will be a big IF. US govt will go bankrupt trying to pay just the interest on debt, if interest rate goes up significantly. I don't think they will allow that to happen.

Gary said...

Ssg, it could play out differently to the 1970s, perhaps a much shorter cycle.

'They' don't control longer term interest rates, the market does. The bond bubble is headed for bust in my opinion, many governments will go bust, or their currencies if they keep printing.

AdvocatusDiaboli said...

Does somebody remember the inverted Exter pyramid? Does somebody find any sense in it? I say as decent probability. And if so, the wave right now is in the middle of the pyramid, next stop paper money.
The bottom says gold. Not really sure about it, if that's still valid today, since Exter was kind of old school pre 1971...
Anyway, could not find gold miners on the pyramid :D

The timing is the tricky part. Kicking the can worked quite fine for Japan, why not for the world?

Grumps LaBastard said...

Miners really shine when the real price of gold goes up. During the supposed bull run of the 2000's all commodities went up.

The leverage of a gold miner comes in 2 ways. First, the cash flow goes up or down by a bigger % than the percentage move in bullion. For instance it takes $850 for Agnico to pull an ounce out of the ground. If gold goes up 10% from here, AEM's cash flow goes up about 25%. Another producer whose cost is higher will actually experience a bigger increase in cash flow.

Another avenue of leverage to gold and the most important is the valuation of the ore body. If gold is seriously revalued overnite, then your long-time way-out-of-the-money put option finally pays off big time. It protects you against devaluation.

And there are Pyramids that have gold miners on the bottom along with gold.

If interest rates go up it will be due to money flows fleeing the bond market. It won't be until an equilibrium is reached with general cost level expectations and interest rates that money will bid for a rollovered bond. Just because rates are rising doesn't mean a bear market for gold. You have to factor in what CPI expectations are. Let the Fed raise rates. These bonds are collateral/reserves. Rates rising means collateral values going down.

AdvocatusDiaboli said...

Grumps,

"For instance it takes $850 for Agnico to pull an ounce out of the ground."

If that's the case, then why is the stock almost where it had been eight years ago? Okay pardon, stock price is only the buy and sell of the stockholders, lets neglect that for a second and turn to the fundamentals:
Then why are they paying a dividend of just 2% maximum if they are such a great profit company, with mining costs always far below gold price? In the meantime their liabilities have still been rising, dissolving their own capital more and more. What's wrong with them, havent they paid enough newletters writers to pump their stuff to retards?

"And there are Pyramids that have gold miners on the bottom along with gold."

yes,there are plenty of retards out there, probably you find some bitcoins 'tards as well.

Gary said...

FYI, a revised longer-term chart has now been edited in to this post for your enjoyment.

STFU, we go the extra mile for our customers.