Most important gold peaks of the past 40 years occurred well after the monetary backdrop had turned gold-bearish
The following is excerpted from a commentary originally posted at www.speculative-investor.com on October 28, 2012.
In the October 1st weekly update, we described three signs that will likely be seen at around the time of, or just prior to, gold's ultimate price top. First, we said that by the time the ultimate top of gold's bull market is close at hand the general public will have given up on the idea that returning to economic health requires more money-printing, more government spending and more debt. The purveyors of such economic quackery will still have their fans, but they will most definitely be in the minority. Second, we reiterated the historical fact that the most important gold peaks of the past 40 years occurred well after the monetary backdrop had turned gold-bearish. We then said that as a consequence of gold's tendency to follow major changes in the monetary situation, gold probably won't reach its ultimate top until well after the Fed stops trying to 'stimulate' the economy using cheap credit and money-pumping. Third, we cited the strong tendency observed under the current monetary system for long-term bull markets to go to absurd extremes and culminate in spectacular upside blow-offs during their final 12 months.
Not one of these three signs has been evident during the past few years. Furthermore, based on the time it would take for the above-mentioned signs to appear it is reasonable to conclude that gold's ultimate price top lies a minimum of two years into the future.
We are revisiting this topic today because our October 1st commentary omitted an important indicator of a gold top. It's an indicator we've included in many TSI commentaries over the past 10 years that for some unknown reason escaped our most recent discussion of what to look for when trying to determine if gold's bull market is nearing its end. We are referring to the relationship between gold and the U.S. stock market. The relationship is illustrated below and can be expressed as follows: Secular trends in the Dow Industrials Index relative to gold go hand-in-hand with secular trends in stock market valuation (represented on the following chart by the S&P 500's price-to-peak-earnings ratio, also known as the Hussman P/E). Due to this relationship, gold probably won't be close to a major peak relative to the Dow until after the SPX's Hussman P/E makes a prolonged move to single digits. To put it more succinctly, near a major gold top the U.S. stock market will be very under-valued.
Note that the relationship between gold and the stock market isn't just a coincidence. It stems from gold being the world's most durable, transportable and widely accepted store of value. As other investments fall out of favour (as indicated, for example, by a long-term downward trend in the U.S. stock market's P/E ratio) there is an increase in demand for the store-of-value function that gold has provided with great success for thousands of years.
The U.S. stock market is not remotely close to being undervalued at this time. Therefore, the link between gold and the U.S. stock market's valuation is sending the same signal as the other indicators of a major gold top, which is that a major gold top is probably still years away.
Regular financial market forecasts and analyses are provided at our website:
http://www.speculative-investor.com/new/index.html
We aren’t offering a free trial subscription at this time, but free samples of our work (excerpts from our regular commentaries) can be viewed at: http://www.speculative-investor.com/new/freesamples.html
Stockhouse Conflict and Disclosure Policy:
Stockhouse publishing Ltd., owners and operators of Stockhouse.com, has established the following rules to ensure that there is no appearance of impropriety on the part of any Stockhouse Editorial writers ("Writers"). The content of Stockhouse Editorial articles (the "Articles") are the opinion of the Writer and any reliance on the content of these articles is at your sole risk. Our Writers are not registered investment advisors. You should not make any kind of investment decision in relation to Articles or stocks discussed in them without obtaining advice from a registered investment advisor.
Facts relied upon by our Writers are generally provided by the subject companies or gathered by our Writers from other public and/or private sources. These facts may be in error and if so, the opinions of our Writers may be materially different.
Writers may own, buy, or sell shares in public companies mentioned in their Articles, but in the Article they must prominently state their ownership position. Thus, a conflict may exist. Writers are not permitted to write Articles that attempt to benefit persons connected to the Writer, such as family or friends, except where disclosure is made in the same way as if the Writer him/herself owns stock.
Writers cannot solicit, accept, or agree to receive anything of value given or paid with the intent of influencing their Articles.
Stockhouse notifies each Writer about these rules, and we rely on the integrity of our Writers to ensure that our rules are followed.
Stockhouse.com: Taking
it to the street
