CrossCurrents and the Case for Gold

12/14/2018 5:00 am EST

Focus: COMMODITIES

Alan Newman

Founder, Crosscurrents Publications, LLC

Since the peak for bullion in August 2011, the metal has been under intense pressure and many gold stocks have declined significantly, asserts Alan Newman, editor of CrossCurrents.

Given that higher gold prices drive profitability, the corrective process for gold miners is perfectly understandable. However, if our thesis of a super bull market for bullion remains valid, then most miners present excellent opportunities at current levels.

Our thesis relies primarily on two key factors. First, we believe paper assets have experienced a secular peak. It is possible that the peak in paper assets may not be surpassed for many years to come.

After all, we have posited the last nine years constitute the third stock market mania in only 18 years, a period unlike any other we can find in all of stock market history. The Roaring Twenties were followed by a depression and 26 years were required before the Dow Industrials were able to surpass the 1929 peak.

Also, we believe the economy is pointing down at this time and the odds for a recession are likely high. From post WW2, our expectation is we are way overdue. The last 11 recessions took a total of 53.5 years to develop from each prior recession, an average of roughly five years.

The longest was a ten year hiatus. It has been 9.7 years from the end of the most recent recession, which we measure today from the March 2009 stock market bottom. We are either due or overdue and our read of the fundamentals places us in the latter category.

As such, we still believe accumulation of relatively solid companies like Newmont Mining (NEM) and even speculative stocks such as IAMGOLD (IAG) as a valid strategy going forward, but we also admit to impatience.

Our most likely case scenario places gold eventually between $3000-$3500 per ounce. If our target ratio is correct, the Dow should trade to roughly 15,000, and that is very much in line with our actual forecast of a Dow 14,719 bear market low.

Simply put, if the age of paper assets is ending or has ended, a 5:1 ratio with gold at $5000 would imply the Dow remaining in the 25,000 neighborhood and we just do not see that in the cards.

A considerable portion of investor disappointment in the price of bullion and miners can be attributed to the simple fact that we tend to think of gold priced only in U.S. dollars. In other currencies, such as the Yen, Euro or the British Pound, the charts look a lot more positive.

These economies are the world’s second, fourth and sixth largest in the world. Despite the disappointing Dollar/Gold relationship, bullion is only about 10% from a new all time high priced in Yen.

Given how the charts appear in these other major currencies, we must remain in the super bull camp. There are simply way too many question marks about the future and gold’s historic place as the currency of last resort cannot be ignored. We are still accumulating.

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