Don’t be confused. Gold and silver prices will skyrocket in the
future based on the fundamentals, not technical analysis. Not only will
fundamentals be the important factor in the future, they have also been the
leading indicators over the past 50 years.
I realize I will get a great deal of flak for stating this, but the facts
presented below paint a pretty clear picture. Now, while it’s true that
the many of the gold and silver analysts (including this independent analyst)
under estimated the level at which the Fed and Central Banks could prop up
the Greatest Ponzi Scheme in history… it’s better to be early than late.
I wrote this article in response to one of the guests on Al Korelin’s
radio show. It was Avi Gilbert of ElliotWaveTrader.net.
Avi told Al Korelin that the bottom of gold and silver market were close.
He said the four-year correction was nearly over and the next precious metal
bull market was close at hand.
That sounded real swell until you read his recent article, Stop The Insanity As Misinformation About Gold Continues To
Reign. Here is how Avi views most of the gold and silver (bug)
analysts:
Why is it that most who are followed in the metals market and viewed by
many as “experts” are so horribly wrong week after week, yet continue to
present the same analysis week after week? Are the majority of the
participants in this complex really that foolish to continually follow such
clearly erroneous perspectives with the “hope” that it will eventually be
right?
Avi’s comment here actually sounds logical to many precious metals
investors who bought metal at higher prices hoping a recovery was soon at
hand. Unfortunately, as gold and silver prices continued to decline,
investor frustrations increased. While gold and silver analysts
can be guilty of being wrong on the timing, they won’t be wrong on the
FINANCIAL EVENT OF A LIFETIME.
I want to take certain parts of Avi’s article and show evidence why the
fundamentals are the driving force in the value of gold and silver, not
technical analysis.
FUNDAMENTAL #1 The Key Driver For The Precious Metals Prices
In his article, Avi made this remark about the precious metal bull market:
I want to start by saying that, yes, this 4+ year correction will conclude
soon. So, this market will begin another bull market in the not too
distant future. You see, markets, over the very long-term, will
continue to rise, as society continues to progress throughout history.
Avi believes the precious metal bull market will begin shortly and will
continue to rise as society continues to progress throughout history. I
don’t know if we will experience a long-term bull market, but rather a rapid
rise in the value of gold and silver seems more likely.
Furthermore, the notion that society and markets will continue to rise in the
future indefinitely doesn’t seem likely either. I will discuss this at
the latter part of the article.
I put this chart together (below) to show why the price of gold behaved a
certain way since 1940. You will notice two lines in the chart.
One shows the price movement of gold and the other of oil. If you look
at the price of gold and oil from 1940 to 1970, they are basically
flat-lined…. dead. Nothing going on there:
However, two amazing things took place in the beginning of the 1970
decade. Everyone knows Nixon dropped the Gold-Dollar peg (1971), but
what was the other? U.S. domestic oil production peaked in 1970 and
begin its inevitable decline. This caused serious consequences that
were felt a few years later during the Arab Oil Embargo:
During Arab Oil Embargo, the price of oil shot up from $3.29 in 1973 to
$11.58 in 1974. Then during the Ayatollah Khomeini-led revolution,
Iranian oil production declined 72% from 1978 to 1980. This had a
profound impact on the price of oil as it skyrocketed from $14 in 1978 to
over $36 in 1980. Please look at the next two charts and see how this
impacted the price of gold and silver:
While analysts continue to regurgitate that the rapid rise in the price of
silver during the 1970’s was due to Hunt Brother buying, who in the living
hell was buying gold and oil to drive up their prices?? Never get a
good response for that question.
Regardless, the price of oil increased 16 times its 1971 level,
silver 16 times and gold jumped 15 times. Interesting that the
precious metals moved up about the same percentage as oil. Wonder how
technical analysis charting could forecast the peak of U.S. oil production,
the Arab Oil Embargo and the Iranian Revolution.
The same thing happened to the price of gold and silver from 2000 to
2012. As the price of oil shut up from $24 in 2001 to $111 in 2011, the
price of gold and silver surged to a record high of $49 and $1,900
respectively.
Let me show you the same Gold vs Oil chart from above:
After the huge rise in the gold and oil price in the 1970’s, they both
declined and traded in a range-bound fashion for the next two decades.
It wasn’t until the rapid rise in the price of oil from 2004 until 2011, did
the price of gold hit new highs.
Again, the huge increase in both the price of silver and gold were
not due to technical analysis or another overdue “Bull Market”, but rather
from the fundamental change in the energy market. Investors
need to realize ENERGY DRIVES the markets, not FINANCE.
FUNDAMENTAL #2: Peak Oil Will Destroy The Market & Most
Financial Assets
The one fundamental that Technical Analysts can’t chart on their graphs is
the impact of peak oil on the value of most assets (or supposed assets) going
forward. What we are heading into is much worse than anything Technical
Analysis can forecast.
Unfortunately, most people still don’t realize the implications of peak
oil. The valuations of most financial assets are based upon a financial
principle called “Net Present Value.” Basically, it’s like a time
machine. A current stock price is based on future earnings.
Future earnings are based on economic growth. And economic growth is
based on burning energy.. and not only energy, but a growing energy supply.
Jean Laherrere was kind enough to send me his updated Bakken Oil
Chart. But before I show that chart, let me show the North Dakota oil
production chart he sent me several months ago:
As we can see, the Bakken is the major portion of North Dakota’s oil
production. The chart of Bakken shale oil production (green) has gone
up almost exponentially. And, what goes up exponentially, comes down
exponentially. According to Jean’s calculations (based on
ultimate reserves), is that the Bakken oil production will fall below 100,000
barrels per day by 2025.
Here is updated chart of North Dakota and the Bakken:
Again, the (dark) green is Bakken oil production and the red is number of
wells producing. You will notice something interesting happened at the
top of the graph…. production (green) started to decline, while wells
producing (red) continue higher. Thus, overall oil production
is now falling while the number of wells grow. This is not a good sign.
We can see the peak more clearly in Jean’s final chart:
Now, while this is only showing the peak and decline of North Dakota
(mostly Bakken) oil production, the other major shale oil fields in the
United States will follow suit. When 2016 rolls around, we are going to
see serious fireworks in the U.S. Shale Oil industry.
Last week I spoke with a gentlemen who is the president of his own
independent oil company in Texas. He’s an oil geologist looking for
conventional oil projects and knows just about everyone doing the same type
of work in Texas, Oklahoma and Louisiana. He told me that the current
situation in the U.S. oil industry is worse than what took place in 1985.
He went on to say there was serious trouble ahead next year for the medium
and small oil-gas companies. Furthermore, he said that he couldn’t
start working on new conventional oil projects unless the price of oil
reached $60-$65. It’s now trading at $39, and looks to go much lower.
In addition, the only reason the world was able to afford high oil
prices was due to the massive increase in debt. I just came to
the realization, from the work of Gail Tverberg at Our Finite World
, that the higher the price of oil goes, the higher the amount of debt that
is needed. Which means, low or zero interest rates had to follow as
this massive amount of debt is not serviceable at mid-high interest rates.
I will write more about DEBT-OIL-GDP in future articles. But, please
understand that the massive amount of debt is not sustainable and a collapse
is certain. Moreover, once this debt implodes or is written
off, then U.S. and global oil production will collapse as the market can’t
afford mid-high oil prices without adding even more debt.
This is the reason the value of most financial assets will implode.
Unfortunately, I do not have a crystal ball as to know when it will occur,
but we are witnessing current market volatility and geopolitical insanity due
to peak oil… whether we realize it or not.
FUNDAMENTAL #3: Peak Oil Makes Technical Analysis
Completely Worthless
Avi Gilburt stating this toward the end of his article:
Folks, belief in fundamentals, physical demand, production, war, etc. have
not and will not provide you insight into the turning point for gold. Gold
will not bottom until the sentiment for it has gotten so bad that it will
have only one way left to go. That is simply how markets work. Period. End of
story. No exogenous event or fundamentals will change that, and if
you have not learned that the hard way over the last 4 years, then there is
truly no hope for you, or anyone you chose to follow. Yes, I know
some of you will view me as harsh, but someone has to sound the wake-up call
for the zombies that populate this market.
Avi says that no “exogenous event or fundamentals” will change the gold
market. Well, I just showed during two-time periods when exogenous
events (1971-1980 & 2001-2011) did impact the prices of gold and
silver. Anyone with a heartbeat and decent eyesight can tell from
the Gold vs Oil Chart 1940-2015, that the price of oil had a direct impact on
the price of gold.
As I have stated several times, the coming surge in the value of gold and
silver will occur during the collapse of the Greatest Financial Ponzi Scheme
in history. This collapse will occur as we experience a precipitous
decline of U.S. and global oil production.
People need to realize that the Fed and Central Banks can’t raise
interest rates because we don’t have a CHEAP GROWING ENERGY SUPPLY.
Where do you all think the “Interest” comes from?? Do you really think
interest on a loan or bank account comes out of THIN AIR?? It comes
from a growing energy supply.
IMPORTANT: The Fed and Central Banks had to
increase debt to continue growth. To get growth, you need a growing
energy supply. To get a growing energy supply, we needed higher oil
prices. To get higher oil prices, the Fed and Central Banks had to add
a larger amount of debt. By adding more debt on top of more debt, INTEREST
RATES had to fall because the service on the debt was unsustainable.
Can you imagine if the Federal Reserve and U.S. Treasury normalized
interest rates? The annual U.S. interest payments on the debt would be
over $1 trillion.. or more. How will this interest be serviced as U.S.
oil production heads into the crapper??
You see, this sort of fundamental approach to forecasting in a
peak oil environment can’t be charted using Technical Analysis.
While I don’t know the date when the value of gold and silver will reset to
substantially higher prices, it’s a matter of years, not a decade. Once
U.S. oil production starts to fall precipitously over the next several years,
this will put severe stress on the highly leveraged U.S. Financial Industry.
Lastly, the notion that we are going to see society continue to
progress in the future is a lousy one indeed. I would imagine
any ancient Roman wise enough to make this same prediction back before the
Empire collapsed as the great city fell from a population of one million down
to 12,000, would have sounded like a real KOOK.
I truly believe the world will be a much different place by 2025.
This will not be due to technical analysis, but the fundamental peak and
decline of U.S. and global oil production. Investors waiting
for turns in paper assets via technical analysis will wish they spent more
time focused on owning physical precious metals.
