History Hints at a Massive Move
Gold has always been a popular investment choice, and for good reason. In this article, we will explore the longer-term bullish case for gold and examine the technical and macro factors that support its upward trajectory. We will also discuss the cyclical nature of gold and its relationship with the stock market. So, if you're interested in precious metals and want to understand why gold is poised for a historical move up, keep reading.
The Long-Term Bullish Case for Gold
To understand the bullish case for gold, let's take a look at its long-term performance. Just like the stock market, the price of gold has consistently gone up over time. Contrary to what some investors claim, gold is not a dead asset class. In fact, during precious metal bull markets, the returns can be massive.
For example, between 1970 and 1980, the price of gold rose by a staggering 2,000%. This demonstrates the potential for significant gains in the precious metals market due to the intrinsic value of gold and the impact of monetary debasement. The expansion of the monetary supply has pushed assets higher, including gold and stocks. In fact, since 1969, gold and the S&P 500 have performed equally well.
One interesting chart to highlight this is the comparison between the price of gold and the M2 money supply. Over time, the price of gold always catches up to the money supply, indicating the impact of monetary policy on its value. This inverse correlation between the stock market and gold suggests that when stocks go up, gold tends to underperform, and vice versa. Understanding this relationship can provide opportunities for investors to outperform the markets.
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The Gold-Dollar-Fed Rate Dance: Poised for a Change in Tempo
Gold's relationship with the US dollar is like a waltz, with the two constantly stepping in opposite directions. As the dollar strengthens, gold loses its luster, and vice versa. This intricate dance is further influenced by the Federal Reserve's interest rate policy. Higher rates generally boost the dollar, pushing gold down. Conversely, lower rates weaken the dollar, creating fertile ground for gold to flourish.
Currently, we find ourselves at the tail end of the Fed's rate hike cycle. After a period of aggressive increases, the central bank is expected to slow down or even pause its rate hikes. This shift in monetary policy could be a pivotal moment for gold.
With interest rate headwinds easing, the dollar is likely to lose some of its shine. This could pave the way for gold to break free and embark on a significant upward trajectory. Historically, gold tends to perform well in the latter stages of rate hike cycles, and the current market conditions suggest that history may repeat itself.
This convergence of factors – a weakening dollar and a dovish Fed – creates an environment where gold could be poised for a major move. Investors who understand this dynamic and are proactive in positioning themselves may be rewarded handsomely when the gold bull charges forward.
The Technical Picture of Gold
Now let's dive into the technical analysis of gold from a long-term standpoint. In August 2020, gold reached a new all-time high, surpassing its previous peak in 2011. This is a significant development because every time gold makes a new all-time high, it signals higher highs ahead. It indicates that the demand for storeholds of wealth, like gold, is greater than the supply, confirming an uptrend and a bull market for gold.
The Cyclical Aspect of Gold
Gold also exhibits cyclical patterns, and comparing the current bull market cycle to the one in the 1970s reveals interesting similarities. Both cycles follow an ABC pattern, with a large move up, a counter-trend correction, and a euphoric rally in the final phase. The current cycle is expected to end around 2024, following a similar path as the 1970s cycle.
Some may argue that this similarity is a coincidence, but the probability of that is low. The driving factors behind these price movements are monetary policy and sentiment. When the real interest rate (nominal interest rate minus inflation) is negative, it creates a favorable environment for gold as bonds are no longer as good of a hedge against inflation. This relationship between monetary policy and gold prices is crucial to understanding the cycles in the gold market.
The Relationship Between Gold and the Money Supply
To analyze the cycles objectively, Game of Trades focuses on the relationship between the price of gold and the M2 money stock. By comparing the ratio between the money supply and gold at different points in history, we can determine if the cycles are similar.
The data from the Federal Reserve website reveals a striking correlation between the ratios of the money supply to gold in the 1970s cycle and the current cycle. For example, in 1971, the ratio was 19, and in 2001, it was also 19. In 1974, the ratio was 4.8, and in 2011, it was around 5 billion. The corresponding ratios at different points in the cycles align remarkably well.
This correlation suggests that the current bull market cycle in gold is not a coincidence but rather a result of the same driving factors as the 1970s cycle. The correlation between the money supply and gold prices provides valuable insights into the macro environment and the potential for gold to reach new highs.
The Future of Gold
Based on the analysis of the ratios between the money supply and gold, Game of Trades predicts that gold will reach a ratio of 2 at the end of the current bull market cycle. This would correspond to a price of around $10,000 per ounce. I believe banks, under the influence of goverments would stepd in and short it to pin the price down. Personally I see gold around $4,500 - $5,500 an oz by 2026 While this prediction assumes that the cycle will follow the same pattern as in the past, it provides a target price range for gold investors to consider.
Conclusion
In conclusion, the longer-term bullish case for gold is supported by its historical performance, the impact of monetary debasement, and the correlation between the money supply and gold prices. The technical analysis and cyclical patterns further reinforce the potential for gold to continue its upward trajectory.
Understanding the relationship between gold and the stock market can also provide opportunities for investors to outperform the markets. By recognizing the inverse
Disclaimer: This information is for educational and informational purposes only and should not be considered financial advice.
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