Consider this 25 year graph of the ratio of gold to S&P 500 Index. Unless you believe, AS I DON’T, that the Fed can levitate the S&P for many more years while squashing gold even further, this 25 year chart shows that gold is currently very low compared to the S&P.
This begs the question, is the S&P high, gold low, or both? Consider this log-scale chart of the S&P and the 65 week moving average.
The S&P 500 Index is about 100 points (June 26, 2015) above its 65 week moving average, as shown by the blue moving average line on the graph. The Disparity Index (deviation from the 65 week moving average) shows that the S&P has been strong since 2012. The upward trend line will be broken with a decisive fall below about 2,080, which seems likely to occur soon.
Examine a similar chart for gold.
The disparity index has been weak since early 2012, after the all-time high gold price at the end of August 2011. The gold market could turn higher at any moment.
- Gold has been weak for over three years.
- The S&P 500 has been strong for over three years and appears to be at a 7 to 8 year cyclic peak.
- The ratio of gold to the S&P is at a 7.5 year low and sitting on the bottom of a trend channel, as I have drawn it.
- Gold looks oversold while the S&P looks too high and dangerously over-extended. A correction substantially below 2,080 would break the uptrend line and a break below about 2015 would penetrate the 65 week moving average. Watch out below!
The Exponential Big Picture:
Consider the log-scale graph of the sum of the S&P 500 plus gold prices. Note the exponential rise over the past 25 years. The trend channel shows an exponential rate of change of 5.01% per year.
WHAT COMES NEXT?
- Deflationary Depression?
- More of the same?
- Massive Inflation or Hyperinflation?
Option one is a deflationary depression that results from massive debt defaults that central banks can’t “paper over.” This could happen but the central banks have shown they have the motive, means, and opportunity to weaken and slowly, or rapidly, destroy the purchasing power of their currencies to counter deflationary forces.
Option two is “more of the same.” Massive deficit spending, more Greek tragedies, global debt of $200 Trillion increases to $500 Trillion and counting, and the “derivative monster” continues to generate revenue for the big banks without attacking its banker masters and destroying them. The easy prediction is more of the same.
Option three is massive inflation or hyperinflation. The governments of the western world and their central banks ignite the inflation bomb, either intentionally or by mistake, and blast currency creation into orbit. This seems more likely every day, especially as the bond bubble looks ready to implode.
Consider the graph of the sum of the S&P and gold, but extended another ten years.
The high end of the “more of the same” range is about 6,000 to 7,000. The gold to S&P ratio is gradually rising so assume gold is approximately $3,000 to $4,500 and the S&P is approximately 1,500 to 3,000 by 2025.
The hyperinflation and the deflationary depression numbers would be much higher or possibly lower. My belief is that central banks, which clearly want inflation and fear deflation, will find a way to create the inflation they want. Expect “more of the same” or much higher inflation, perhaps hyperinflation, in our debt based, unbacked, fiat, easily printed, “inflate or die,” Quantitative Easing, digital and paper, divorced from reality, currency world. Expect much higher gold prices.
Ayn Rand: “We can ignore reality, but we can’t ignore the consequences of ignoring reality.”
We can ignore the lessons of history that show unbacked fiat currencies always die, but we can’t ignore the consequences of ignoring history. Those consequences include devaluing currencies, transfer of wealth to the banks and the Asian countries that hold physical gold, hyperinflationary destruction of wealth, destruction of the middle class, destruction of the bond market and the supposed wealth represented by debt based paper IOU’s.
IQ test: Physical gold or
German Bunds paying 0.5%
10 year US Treasuries
Gary Christenson | The Deviant Investor