Via email from Tom McClellan, please consider Gold’s 8-Year Cycle.
We are now entering the upward phase of gold’s 8-year cycle, and that should bring some fun gains. And this comes at a time when gold has not been getting much of investors’ attention. If gold stays flat for a year, and Bitcoin twinkles to get all of the attention, speculators eventually drift away from gold. That sets up a great opportunity for gold to start getting more attention, and more money thrown its way.
As with most market cycles, gold’s 8-year cycle is measured bottom-to-bottom. But there is more to it than just that 8-year period between major bottoms. It typically sees a 3-year upward phase, which is where most of the big gains are seen. Then the 5-year downward phase actually has a 3-wave process of going down.
This has been evident since shortly after gold started trading freely in 1975. The cycle was probably lurking out in the wild, but it was just not evident with the Treasury department fixing gold prices prior to the 1970s. The 3-up, 5-down pattern saw one anomaly in the 2000s, when prices were mostly up all the time during that cycle. But if you look hard enough, you can see the inflection points of the 3-wave down move within that upward trend.
Now that we are in the 2010s, the pattern appears to have returned to its normal 3-year up, 5-year down phase, and reset for the next 3-year up phase. So why has gold not started screaming higher already?
My answer is that there is another independent cycle also at work that has kept gold price down in late 2017, and that is the 13-1/2 month cycle.
This cycle is also a bit unusual, in that it usually contains a mid-cycle low about halfway between major cycle lows. And as I discussed back in September, it is a bullish message to see “right translation” in the last cycle.
That term means that the price high after the mid-cycle low is higher than the one before it. Seeing right translation means that prices should not go down to exceed the prior major cycle low, and that they should do well in at least the first part of the next cycle, which is starting right about now. We saw “left translation” in the 13-1/2 month cycle from 2011 to 2014, as gold prices were in a protracted downtrend during the 8-year cycle’s descending phase.
As we head into early 2018, we have both the 8-year cycle and the 13-1/2 month cycle in their ascending phases. That means both horses are pulling in the same direction, and it should mean good things for gold prices especially in the first half of the year.
Tom McClellan
Editor, The McClellan Market Report
Fundamentals and Cycles in Alignment
McClellan discussed Gold’s 13- 1/2 Month Cycle on September 7. Inquiring minds may wish to give it a look.
Some people believe in cycles and others don’t. Here are some other points to consider.
- Fundamentally, sentiment in gold is washed out. Few want it, even as a hedge even though gold had its best year this year since 2010.
- The media is touting Bitcoin as “the new gold” despite the fact the comparison is mostly ludicrous.
- Investors are chasing FAANG (Facebook, Apple, Amazon, Netflix, and Google as if valuations no longer matter). A market realignment is going to happen.
- Every week we see reports on why stock are cheap compared to bonds, and analogy that makes a much sense as Bitcoin is cheap compared to moon rocks.
- The US tax cuts will add a minimum of $1 trillion to national debt in the next 10 years. I expect triple that.
- If US interest rates do not rise as most expect, faith in central banks will again come into play.
- If there is a crisis in the Eurozone (Italy, Germany, or Spain are likely places), faith in the ECB will come into question.
- Already we are seeing yields rise in Italy vs. Germany.
- Despite analysis that suggests the US economy is strengthening, yields on the long end are not going up. The yield curve is flattening.
- The US treasury market does not believe in economic strength, and neither do I.
Faith in Central Banks
Points five through 10 pertain to faith in central banks. This is how I view things.
I did not post that on a log chart, but events line up as per McClellan’s 8-year cycle.
ECB president Mario Draghi nearly timed the top of the gold market with his now famous “I will do whatever it takes to save the euro, and believe me, it will be enough”.
What did he do at the time? Actually nothing. His speech was all it took. Later he added QE that is doomed to fail.
Fundamentally, we are lined up on numerous fronts for faith in central banks to come increasingly under pressure.
- Consumers are under increasing pressure to pay debts (see Paying Down Christmas Debt: How Long Will It Take).
- Houses are well beyond affordable.
- The auto sector is holding up only because of hurricane replacement.
- And US debt is out of control (See Debt to GDP: Only 4 Major Countries Worse Off Than the US ).
- A recession was only staved off by multiple iterations of QE. Another recession is overdue by many measures.
- The stock market is in a bubble of epic proportion. Median PEs are the highest in history. For discussion, please see Oppenheimer Predicts PE Expansion, Most Bullish S&P Forecast Yet .
It will not take much of anything to trigger loss in faith in central banks. The equity bubble bursting is a likely candidate. A currency crisis is another.
For those who believe in cycles, the timing is perfect for a strong runup in gold.
How Much Gold?
With so much going for it, inquiring minds may wish to consider How Much Gold Should the Common Man Own?
Mike “Mish” Shedlock
I think we can agree that Tom McClellan is an accomplished technician but he appears to have his ideas about cyclical behavior that are contrary to classical cyclical analysts. Second only to Martin Armstrong, the late Walter Bressert was probably the most accomplished “cycle analyst” of the 20th century. He coined the terms right- and left-translation as regards price action within a cycle and his definition most definitely is not that which McClellan uses. Bressert would have said, “Right translation is the tendency of prices to peak in the latter part of the cycle during bull markets and left translation is the tendency of prices to peak in the front half of the cycle during bear markets.”
Bonkers, the sign I used to know when the top was in was when there lots of ads for gold on the radio, and lots of shops popping up that buy and sell gold. The ads are mostly gone, but the shops are still around. There are still a lot of gold bugs, so I can’t use attitudes to call a bottom. I really don’t know where gold is going. I do know that there will be another up wave at some point, but I rather guess it’s a long cycle, once a generation. That gave us peaks in 1982 and 2011. I see the next peak in 2036-40, which also, not coincidentally is about when I see the end of the US on the horizon, to be followed by some sort of dictatorship, most likely a populist/socialist one.
Thank you Mish for publishing the story. If only it was as easy as following a cycle. Armstrong has proven that his market analysis has been on the money as others have been calling for an historical correction of 10% in the market. The market price has risen for over 8 yrs from 2009 low 666.6. Heading to the 8.6 cycle that Armstrong found relevant. Happy New Year to all and may our brains still can differentiate the right path tomorrow for yesterday is lost.
From my studies of Elliot Waves and Hurst cycles, markets are made up of over 10 degrees of trend, or cycles, at one time. Amplitudes and periods of cycles vary over time. So to forecast any market with only one cycle is an incomplete analysis. E-waves analysis is showing a large degree textbook triangle pattern that is nearly complete. Triangles are consolidation patterns. The direction into the triangle is the direction out of the triangle. With gold, the trend was down going into the triangle, so once the triangle completes in the first half of 2018 (maybe 18Q1) there will be a second strong sell-off lasting at least a year.
… and central bank actions in general. More monetary pumping just round the corner and gold knows it. Anyhoo, each to his own.
… and some of the alleged fundamental justifications are frankly bonkers. Gold correlated with economic fundamentals? Really? Check out monetary inflation for starters
All this negative talk about gold’s prospects is a sure sign that a bottom is in.
Just because one is unaware of something does not mean it does not exist. Sorry, but anyone who does not understand that cycles exist are simply ignorant. Do you understand how light and sound move? Ever hear of heart and brain waves, or go to the beach? Hello? Everything in the universe with energy moves in cycles/waves, especially business and climate. Only the people that never studied them attributes the changes to “random walks”, or only the govt can manage/suppress them (i.e. climate and business cycle).
link to armstrongeconomics.com.
Brokers cover their ass with asset allocation models because they can’t forecast, and politicians will never admit they have no control over the cycles because then how could they ever con voters?
Cycles also teach us there is ALWAYS someone on the other side of the trade – Ying & yang. Mish, I will gladly buy the stocks you and your followers will be selling. The bigger the pullback in stocks, the bigger the slingshot move higher. The move off the March 2009 low was just a warm up. I will reiterate my bet that you never took, that the DOW will be over 40K within 4 yrs, because of the collapse in confidence of foreign GOVTS, NOT CB’s.
1. If gold is washed out its because the gold bugs never say sell, and only say buy, buy, buy, as if gold is different from all other assets. Sadly, many will miss the move higher because trust is lost. Stocks will outperform because it’s the only market that’s deep and liquid enough to absorb the flows that will come screaming out of govt bonds. The younger generations don’t care about gold, just as older generations don’t understand technology, especially the software behind Bitcoin.
2. The mainstream media, the mouthpiece of the establishment, does NOT tout Bitcoin, as it is their nemisis. Bitcoin provides more value than gold, including the ability to be easily transported across boarders.
3. Just as bond and gold valuations don’t matter during a crisis, stock valuations won’t matter when no one wants risky govt bonds during the the sovereign debt crisis.
4. Traditional valuation metrics are useless in a period that has never been seen by any living fundamentalist. How do you know what Bitcoin is worth? What percentage of the $70+ trillion in investments will flee to cryptos? Currently, there’s a little over $0.5 trillion invested in crypto’s, which will easily rise to 10-20% in the next four years, as the current system implodes. WHAT’S THE ALTERNATIVE? A 15% share results in the total market cap of crypto’s being 20 times higher. A $50K price for Bitcoin is a no brainer next year, and $200K will be easy by 2020.
5. US tax cuts will result in an avalanche of capital from Europe and other countries that won’t reform, as they seek the relative safety of the US dollar. It will also unleash competitive tax devaluation, as we are already seeing with China, who is not only reducing the tax on foreign invest to ZERO, but refunding the taxes paid in 2017. Russia is also offering a 13% tax on repatriated capital.
6. Rates will rise as confidence in govt falls. Who has confidence in CB’s?
7. Of course there will be a crisis in the EU and in the euro. Yes, the ECB has made the problem worse, but the problem was created by the flawed design of the euro, which is the fault of bureaucrats. Just as with the US, the problem is career politicians, not CB’s. You could audit or end the Fed tomorrow, but it would not end the confidence killing fraud and corruption that is caused by the absolute power of govt.
8. Yes, yields will rise in Italy as the anti-establishment victory gets closer with the March elections. The sooner the periphery breaks loose from the euro the better. By 2020, vacations in Greece and Italy will be very cheap.
9. Of course the US economy is not strong, but it has nothing to do with stock prices. Watch what happens to yields as the sovereign debt crisis ripples across Europe and heads to Japan. Our turn is coming. No one will want 30-yr govt paper.
10. You shouldn’t be looking at the Treasury market to determine economic strength. Just because no one will want govt bonds at any rate (once they see what’s behind the curtain), does not mean the economy is strong. Despite what Trump says, the economy cannot be great again until govt crashes and burns. Sadly, we will likely see another civil war and/or world war before liberty and freedom rings again. The Collectivist will not go quietly into the night.
Ron, you can’t just look at a chart, and say “I think I see a cycle”. The single most common error in data analysis is this: whatever data you use to create a hypothesis, you have to use a different set of data to confirm and verify it. If you look at the data from 1960-2017, and say “I think I see an 8 year cycle”, then to see if that cycle has predictive validity, you have to use data from another time period to verify it.
“Some people believe in cycles and others don’t.” Yet cycles are all around us. A day is a cycle. A week is a cycle. Stock prices move up, then fall back a percentage, then rise again. Secular bull and bear cycles and the ever popular business cycle.
Higher gold prices tend to correlate with healthy economic activity. A global recession will effect Asian consumers, and should global GDP be improving then gold should follow, but somehow the notion of a global recovery this late in the cycle seems doubtful.
“It typically sees a 3-year upward phase, which is where most of the big gains are seen. Then the 5-year downward phase actually has a 3-wave process of going down.” As the chart shows, gold ran up from 2008 into 2011, then declined for several years. Gold bugs complained that the price was being manipulated down, when it was following it’s typical cycle pattern.
Gold was up a lot on Friday but the miners did nothing. This tells me nothing is happening with gold. Until the miners start to go up, it’s best to just ignore gold.
I’m not much of a believer in arbitrary cycles (say, 8 years) for no apparent reason, but if I look at the gold chart, I do see a repetitive pattern. I see more like a 40 year cycle, which can be a generational thing. The double peak of the 1980-81 is a nice match for the double peak of 2011-12. Then comes a long, declining period, with shorter 8-year counter-trend peaks. The current chart position looks similar to about 1983, which would mean a dip on the horizon, not a rise. From a demographic situation, I expect that as millennials leave their parents homes, the next 20 years will be mostly good times, meaning falling gold prices, consistent with a 40 years cycle.
I have to say I’m not impressed with McClellan. If you want to prove that a function like price vs. time has a periodicity to it you decompose it with a Fourier transform, or better yet, do a wavelet decomposition:link to paos.colorado.edu