By Poly

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In a surprising departure from its normal character, the Gold market has recently been subdued, with little volatility. Even though its Cycle timing is uncertain, Gold should be more volatile than what we’re seeing at present. It’s as if Gold is being ignored, as if the world has finally given up on it. After 4 long years of grinding lower it’s become an afterthought.

That sort of behavior is not bullish for Gold – it wouldn’t be for any asset. Speculative forces drive price in the short term, and an out-of-favor asset like Gold generally won’t pick up much speculative buying. That said, for any asset locked in a cyclical bear market, Gold’s level of apathy is natural part of the Cycle. The speculators left Gold years ago, so there is no real buying behind even the temporary, counter-trend rallies in each new IC.

And even many of the “true” Gold-bugs appear to have given up. During the past 18 months, they have sold the “monster silver boxes” they bought to get them through the hyper-inflation event they believed was just around the corner. Understand, I’m not mocking Gold-bugs. To the contrary, I personally hold a decent amount of physical metal, but my holding it is not contingent upon price, and will not be sold under any circumstances. It’s insurance.

The current apathy toward Gold illustrates that it’s finally moving beyond the bear market bottoming process (the despair stage) and into silent accumulation (the stealth phase). Technically and from a price perspective, this stage is always difficult to see. But from my vantage point, with the luxury of access to the thinking of many investors from varying walks of life, I believe we’ve already arrived at that next phase.

Shorter term, it remains anybody’s guess as to where Gold will go, and don’t be fooled into thinking otherwise. There is, however, a bearish bias to Gold’s current Daily Cycle and chart (below), due primarily to Gold’s inability to punch higher and form a trend of higher Cycle highs. A move below $1,167 would continue Gold’s series of lower lows, and would be a real warning about its near term intentions. At present, it’s really the bulls that need to prove themselves.

5-9 Gold Daily

The Investor Cycle is also difficult to read. What is especially strange about the current IC is that the first 7 weeks have yet to show any real upside action. ICs, even those during bear markets, always manage a significant upside spike in the first 5 to 7 weeks. But the current IC has seen only tepid upside and, to be honest, I’m not sure what to make of it. Gold generally conforms well to Cycle patterns, so I typically have a fairly good read on it. But its current behavior is different than in the past, and it doesn’t provide a straightforward read.

If this is week 7 of the IC, it is already an outlier since it has rallied the least of any IC in the past 17 years (40 ICs). And if, by chance, Gold is still locked into an extended Cycle dating back to November, the current 7 week period would be very odd behavior for the tail end of an IC. Because the Cycle action is so unclear and so divorced from historical precedent, it would be misleading for me to attempt to paint a convincing intermediate term picture for readers. It could well be that the current sideways action will be the character of this entire IC, and that we’ll see similar movement for 10 to 14 more weeks to the end of the IC. If so, we’ll see a neutral Cycle.

5-9 Gold WeeklyMany people have given up on Gold, but this is exactly the type of economic environment in which Gold is set to shine. With inflation near zero or in some cases negative, and with low interest rates and equities at high valuations, there is little opportunity cost to holding Gold. And in the case of a negative interest rate policy, Gold can be less costly to hold than bank deposits!

As a hedge against the risk of terrible economic consequences from the expansion of the overall money supply, the case for holding Gold today is more compelling than at any time in recent history. Shown below is the massive and unabated expansion in the money supply (M2) and I anticipate that it will only continue. Since Gold is money, its 4 year slide makes it increasingly under-valued.

5-9_M2_FREDAnd the FED isn’t helping the monetary situation by buying assets and placing them on its balance sheet; these are not being reflected in the money supply. At $4.5 trillion and possibly set to increase again, these assets will at some point be reflected in the price of Gold.

5-9_FED_balance_sheetIn my view, it’s only a matter of time before Gold begins to move higher. It’s just not rational for large funds to continue paying negative “real” interest rates to hold debt issued by Switzerland, Germany and Japan for a 10 year period. Gold is the ultimate hedge that pays no interest, but which has absolutely zero debt claims against it. To have Gold actually yield higher real returns than paper assets issued by deeply indebted sovereigns can only be bullish for Gold going forward.

So the message for Gold holders one of hope and not gloom; the “despair” period is behind us now. At this point, smart money is accumulating Gold in preparation for the next phase of the market. It’s impossible to know whether Gold will be immune to future sudden price drops, but it’s not my intention to call the absolute price low for Gold. Although it’s not completely evident in the current price action, I remain convinced that the bear market is over and that the current environment is setting the stage for positive real returns for Gold in the coming years.

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