The Next Bull Leg in Gold

06/09/2015 9:00 am EST

Focus: COMMODITIES

Alan Newman

Founder, Crosscurrents Publications, LLC

We believe a super bull market for gold commenced with the 911 terror event. Simply put, the world changed that day, explains Alan Newman, editor of CrossCurrents.

The proximity to the tech mania bubble top is coincidental but buttresses our view of a generational peak in paper assets.

On the surface, it is easy to argue that these views are wrong as the Dow Industrials have climbed 88% since 911. That equates to annualized gains of roughly 4.7%, close to the historical norm.

So, where is our argued peak in paper assets? It’s only when you factor in inflation that you see the true picture. From 911, stocks as measured by the Dow are up only 41.1% whereas gold has soared by 224.3%.

However, even that picture is skewed, terribly so. Inflation as measured by the CPI is higher since 911 by only 33.3%, as the federal government takes every precaution to mollify the populace and imply all is well.

In our view, inflation has been significantly understated. Under the 1990 computation—before the government insisted upon massaging the numbers—inflation is currently 3.5% as opposed to zero for the official figure. Using the 1980 measurement, inflation comes in at well over 7%.

In the next bull leg of the super bull market for gold, we believe gold stocks will again outperform bullion.

Of course, the question is when exactly is that next bull leg going to commence? Probably not until after stocks begin their long journey from astonishingly overvalued to horrifically undervalued.

We have thought a major top for stocks has been due for many months and see no reason to change this view. While equity prices have gone on to make new highs month after month, the fundamental background still points to a new bear market.

We are very happy to place our trust at this point in the hardest assets of all. While gold prices in the US have clearly suffered since the August 2001 peak of $1920 per ounce, the picture in other currencies is nowhere near as depressing.

The EuroZone is the world’s largest economic block, and while bullion did indeed correct in terms of the euro, the correction ended one year ago.

The Japanese economy is the world’s fourth largest, and in terms of the yen, the correction ended a year-and-a-half ago and bullion is currently only 7.5% below its all time high.

We would again stress the risk in gold equities at this point. When the next bear market starts, even gold stocks will likely suffer.

However, we believe nominal accumulation is always correct and still favor Newmont Mining (NEM), which is up 42.3% so far in 2015, Goldcorp (GG), and the very speculative Iamgold Corp. (IAG). We currently own all three.

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