Since 1971 when President Nixon allowed the dollar’s purchasing power to sink and asset prices to rise exponentially:
- The S&P 500 Index has risen from 100 to 2,480
- Gold prices have risen from $42 to $1,300.
- Most consumer prices have risen substantially.
- S. Government official national debt has increased from $400 billion to $20 trillion.
- S. government expenses, and welfare, warfare and entitlement programs have rapidly increased.
Examine the 46 year log scale graph of the S&P 500 Index and observe the consequence of devaluing dollars.
Examine the 46 year log scale graph of gold prices and observe the consequence of devaluing dollars.
The S&P has enjoyed a long term uptrend with periodic corrections or crashes, as indicated by the green ovals. The S&P could fall over 50% and still remain inside the 46 year uptrend.
Gold experienced a massive bubble in the 1970s, rising from $42 to over $800. Following that blow-off bubble, gold languished in a 21 year bear market until 2001. Gold rallied since 2001 from under $260 to over $1,900 and back to $1,300.
SO WHAT?
Stock markets, gold, and consumer prices rise as the dollar is devalued. The dollar has declined in purchasing power since 1971 and will devalue further because our monetary system has not changed.
Expect the S&P to correct or crash, and then rise again. The ride may be rough. The correction might be extreme. Stormy weather ahead!
Gold will rise as further dollar devaluation and increasing demand are all but guaranteed.
WHAT ABOUT RELATIVE STRENGTH BETWEEN GOLD AND THE S&P?
Consider this graph of the gold to S&P ratio over 50 years.
Observations:
- The ratio is near 50 year lows in 2017.
- The ratio was lowest in 2000 during the stock market bubble and at the end of the 21 year gold bear market.
- The ratio is less than 0.60 in August 2017. It was over ten times higher in 1980 during the gold bubble.
- It is possible that the S&P will rise further and gold will fall, but the ratio over the past 50 years suggests that gold is far more likely to rise.
- Expect higher gold prices and lower S&P prices.
Long term we expect both the S&P and gold to rise as the dollar is continually devalued. The world uses a debt based fiat monetary system where the dollar and most global currencies are backed by nothing but IOUs, faith, hope, debt, and taxing authority. Since 1971 prices have risen exponentially. There is little reason to expect change.
If Russia or China backs their currency with gold in the next decade, gold’s rise will accelerate when measured in devaluing dollars.
In the short term, the month of August has seen the S&P, DOW, and NASDAQ roll-over, based on prices and monthly indicators – the RSI, MACD, and TDI. Past monthly roll-overs in these indicators (from high levels) usually indicated long-term tops and the beginnings of multi-month declines. Weekly and daily versions of these indicators also peaked and declined since August 8, the peak in the DOW and S&P. The NASDAQ composite peaked July 27.
Read: “4 Charts Why You Should Run Away From The S&P 500”
Note the previous roll-over in those indicators.
GOLD – LONG TERM AND SHORT TERM:
Gold rose from roughly $42 in 1971 to $1,300 in August 2017. Gold bottomed in December 2015 and has risen since then. Expect higher prices.
In the short term, the same three indicators on the monthly charts have turned upward. In the past this indicated a continuing price rise.
Read: “Five Compelling Charts Supporting a Bullish Gold Thesis”
WHAT ABOUT GOLD STOCKS?
Gold stocks have fallen for the past decade. See the chart of the XAU, an index of gold stocks.
As the S&P falls and central banks aggressively “ease” to keep stock, bond, and currency bubbles inflated, gold will rise. As global financial fears increase gold stocks should regain lost ground and rocket higher. We shall see…
TheDailyGold.com published an interesting chart tracking past gold stock bull markets, indexed to 100. The chart shows gold stocks 2000 – 2008 and 1960 – 1968 and compares those rallies to the current bull market that began in January 2016. If this bull market is similar to the last two bull markets, gold stocks could triple (or more) over the next six years.
CONCLUSIONS:
- Devalued dollars buy less. The financial system has created trillions of new dollars via commercial banking and central banking, and those newly created dollars compete with existing dollars for goods and services. Prices rise. You know this if you buy groceries.
- The S&P 500 Index price has risen over 46 years. Prices correct or crash every 7 to 10 years. A correction or crash is due.
- Technical timing indicators for monthly (long-term) data rolled over in August for the DOW, S&P, and NASDAQ. The stock markets peaked in late July and early August. More downside seems likely, given that valuations are high. Returns, per John Hussman, Ph.D., should be low to zero for many years because of current sky-high valuations.
- Gold prices rise as dollars buy less. Gold prices are affected by central bank manipulations, global political and economic fears, excessive dollar “printing,” decreasing supply, increasing demand, and more. The gold to S&P ratio is near 50 year lows so gold will be favored.
- A bubble in gold could push the ratio higher by over a factor of ten, as it did in 1980. Gold prices could skyrocket higher if political turmoil, war, or financial disasters create substantial fear. There are clear indications that political and war fears are increasing. Afghanistan, North Korea, Syria, South China Sea, Russia, Iran and more come to mind.
- Would you prefer to own digital shares in a deeply indebted company whose stock is over-valued and correcting, or physical gold under your control?
- How far gold rises depends upon many factors, including the degree of upcoming financial craziness, more QE, political gridlock, escalating wars, and weakening dollar purchasing power.
- Gold and gold stocks should move much higher in the next several years.
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Article written for Gold Stock Bull by Gary Christenson of The Deviant Investor
