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.