Gold Sector: The Early Stages of a Multi-Year Bull Run
Bob Hoye

Long and Great Bull markets for Golds typically follow a Great Financial Bubble.

Using previous examples, the bull market could be long, global and at times euphoric. History shows that some have run for two decades, culminating in the discovery of a storied alluvial deposits. Such as the last great rush for gold at the surface – the Klondike – which was a form of madness driven by the long rise Gold’s Real Price. The Depression naturally featured high unemployment that was suffered virtually around the world.

Typically, an individual prospector made the discovery and if big enough larger companies got involved. Whatever, all the “easy stuff” with significant amounts of gold at the surface have been found. What’s more virtually the whole surface of the land mass has been explored.

The Klondike discovery was made in 1896 and about a 100,000 of those eager to make their fortune made the long and difficult trip. All the easy and productive showings were discovered and worked out by 1899. Enterprising merchants providing goods and services likely made and kept the most money.

As deflated by the CPI, Gold’s Real Price trends down in the final phase of a Great Financial Bubble. Starting with the South Sea Bubble in 1720, the 1929 extravaganza was number five. Ours is number six. And typically, as the real price increased it enhanced profit margins for gold miners. Significantly and for some 20 years, making growth in the sector outstanding. Which contrasted to generally depressed business conditions.

The typical increase on annual averages has been 1.7 times, so let’s look for a double.

Increasing gold production has been Mother Nature’s way of restoring liquidity to the system when the collapse of over-speculated “paper” is destroying apparent liquidity.

Eventually each Great Financial Bubble climaxed in a fury of speculation that included swarms of newcomers to the stock market. Four out of five were followed by a Great Depression, with the first description as such made by British economists in 1884. That key bubble completed in 1873 and the Depression lasted to 1895.

The following records the pattern for the Real Price through every Great Bubble:

Worth repeating is that the play in the Gold Sector continues out for some twenty years to the end of the Depression. When the sensational rushes brewed up. One example was made at Sutter’s Mill, on the American River just inland from San Francisco. That was in 1849 and the excited “prospectors” were eventually called “Forty-Niners”. That Great Depression bottomed in 1844-1845.

That population rush sped up California becoming a state in 1850.

All the great rushes involved alluvial gold at the surface which literally enabled gold to be obtained with very little in the way of tools. These started with a gold pan. The next stage included a shovel and pickaxe, then sluice boxes. As noted above, the Klondike Gold Rush began in 1896 and was essentially exhausted by 1899. Eventually mining grew to include the large dredges with Yukon Consolidated Gold Corporation Dredge No. 4 operating from 1923 to 1966.

In South Africa the Witwatersrand Rush started in 1896 and by 1899 the nature of the system required huge mining equipment when the region was producing more than 20 percent of total world production.

With that Great Depression ending in 1895, even the remoteness of South Africa did not deter eager prospectors.

An illustrative method is to deflate gold by a commodity index. Gold/CRB is convenient as the CRB is a reasonable proxy for mining costs. And as costs decline relative to the bullion price, profit margins increase ,and Gold Miner’s earnings begin a long rise – driving their stock prices up. Which contrasts with the hard times suffered by most of commerce and industry.

Our “Buy” on the Sector was last October and gains in the Sector have been worthwhile.

Through the bottoming process veteran traders like to accumulate small cap Golds. In 1996 we made a list of five, one of which was Arequipa which soared to $30. The approach takes patience, and we have made the following list:

The bull market for the Golds could run for years with some outstanding rallies for companies from Majors to Juniors.

Bob Hoye and Ross Clark have been in the investment business for some 50 years, making them one of the more experienced researchers. Their historical work has been thorough, providing the first recognition of the fascinating transition from speculation in commodities to speculation in financial assets. It was controversial when Bob observed that “No matter how much the Fed prints, stocks will outperform commodities”. In January 2000, the research team concluded that the Dot-Com Bubble would peak in March 2000. In early 2007, the team outlined that the credit markets would reverse in May-June 2007. They did and the stock market followed. 

The call in early October 2017 was for the Bitcoin Bubble to complete in December. Bob’s essays and speeches on political change and on actual climate change have been widely circulated. Our research is based upon a thorough review of financial history. That every great financial bubble has had similar beginnings and endings has been our contribution to the economic literature. This, when combined with our proprietary technical analysis, has enabled some practical calls.

For example, on October 4, 2017 it was that “Everything could be bubbled, including the

DJIA”. In reviewing that a number of outstanding speculations completed near the turn of the year, our target was the December-January window.

At significant tops, the question becomes “Is it up when it should be?” and the ChartWorks confirms the likelihood of a reversal with two possible determinations. One relates to momentum and the critical condition is Upside Exhaustion. Based upon pattern, is the Sequential Sell. On the Bitcoin blow-off, the latter registered on December 19, which was the high day. A technical signal within the window of opportunity.

 

 

chartsandmarkets.com