Long time Dow Theory Newsletter writer Richard Russell ingrained in his readers over the years the 3 phases of a gold market. Investors will want to know what phase are we in today with gold. Here is how Richard Russell described the 3 phases related for gold and you can substitute the stock market or any cryptocurrency like Bitcoin or Ethereum into the description in place of gold to get an idea of where we are.
*First phase is where sophisticated investors, sensing a new bull market, make their initial commitment.
*In the second phase, the public will start to buy gold, this in reaction to increasing political and social uncertainty, rising debt levels and nervousness as to the future of the dollar.
*The third phase of the gold bull market will see a frantic rush by the public to buy gold. In this phase, gold will surge to undreamed of heights–a level beyond what anyone now envisions.
In looking at the gold market today versus my last article on June 13, 2017 Is Gold Set To Lift Off Post Fed And Is The Fed Preparing For A Recession? we see that gold is still trying to lift off after touching a closing low of $1,211.05 on July 11th. I said in that article "We reserve the right to trade JDST and DUST" but we're not looking at those as trades now. We are only looking up for gold as we struggle with the second phase where market makers, banks and funds try to buck us off the gold bull market that started in 2000.
Banks are long gold now and that's good enough for me right now to be long gold and miners.
When Will This Second Phase for Gold End?
This is the part where most who are long term holders won't want to hear what I have to say. But those who have followed me over the years can see some validity in what I say about the coming deflationary credit contraction. We're just not there yet as over the years we have had bouts of QE and lately the Trump Effect delay the eventual contraction in markets as well as gold/commodities.
But first, we have a move up in gold that can take us much higher and there is profit to be made.
So when will this second phase for gold bottoming/consolidating/breaking lower end? You'll know once we break $1,200, fall and move back over $1,200 again, but in reality I think if we do move higher than $1,300 (see below) it will be a break of $1,300 that is our first sign of what's coming.
Whether that is 2017 or 2018, does it matter? Not really, unless you have need of funds for purchases or play options. I get that question all the time as to what price do I think gold will go to and by when? While I do manage the daily moves well in miners, I'm not sure why it really matters the timing as much as the certainty that a deflationary bust will come and a third stage for gold will come where Russell said that gold would reach "undreamed" of heights. It's not going to be decades away, but will be here before you know it. But first things first. Can we enjoy this ride up in metals that we have waited patiently for? Let's take a look at what I think will occur next with gold.
How High Will Gold Go On This Leg Up? - The Good News for Gold
The simple answer on how high this leg up is going to go for gold is to a multi-year high. It's not that farfetched really when you zoom out to a 5 year chart to see what the potential is. We've put in a decent base and had higher lows represented by the red line since the bounce off the $1,200 level.
There is a pop up in the chart below in 2013 where gold hit $1,472.10 but that would be on an extreme move by market makers to get the last bulls to buy and a slight break of that should do the trick. Either way, I will micro manage trades more once we break $1,356.60 (the double top) up to $1,412.00. I won't get too greedy.
This is the part where I'll make people cringe at the thought of what I'm about to say. I outline this though in my book Illusions of Wealth and of course as I always do, back it up with data and complete explanations. If you are then on the same page as me, then you see the same things I'm seeing. If one is stuck on a one way ticket of thought that the dollar is going to crash, hyperinflation is coming, the Fed is evil, banks suck and Goldman Sachs rigs everything, well, that mantra hasn't worked too well the last 6 years.
Zooming out to a 10 year chart, we see a nice decline off of the highs of 2011. You'll see 3 circles on the left where gold peaked in the $973 to $982 range. I don't know where that will be or if we come up short of the trajectory of the red line, but my theory is the same; that we have a deflationary contraction that will take metals lower like they did in 2009.
The Fed is already in trouble with their raise the rate mentality. They have ignored all the data that has come in negative. They are reactive, not proactive as you'll recall as they didn't even see the 2009 crash coming.
And for anyone that thinks the Fed can just print money and fight deflation as Ben Bernanke's infamous 2002 Deflation; It won't happen here" article, I suggest you look over at a M2 and Money Velocity charts and see how printing money can't put a dent in a big deflation. This is the equivalent of pushing on a string. You can't force the money to circulate when many just want to hoard.
(NYSEARCA:JNUG) and NUGT have bottomed and are now ready to take off. We have been off and on long (NYSEARCA:JNUG), (NYSEARCA:NUGT) , (NASDAQ:USLV) and (NASDAQ:UGLD) but the interesting thing is they have not yet triggered green on our weekly which would signify an established trend. I would hold onto these until gold hits $1,300 and then see if it can keep taking out more highs and eventually $1,356.60. By then your trading account should be pretty plush.
The USD/JPY has been falling and once it broke below 113 it gave us more conviction to stay long. The USD/JPY has been a good inverse relationship indicator for miners of late, even better than the dollar, but the dollar has been falling too.
You Can't Hack Gold
Everyone loves a good title. We create them to get readers. This article though isn't about choosing bitcoin over gold. There is room for both in a diversified portfolio, but only gold has been shown to reduce beta if you own 5% in your portfolio. What percentage of one's portfolio should be allocated to cryptocurrencies? 2% might be a good place, but I would only treat it like I would investing in options where it is money you can afford to lose.
Now that you bitcoin traders have learned a little about where we are with gold, so you can debate everyone about how great cryptocurrency is, just know that no matter what the asset, tulips, real estate in Manhattan, gold, or the stock market, nothing goes straight up. You've seen this recently in cryptocurrencies with the big draw-down, but they did rebound from that.
There is a demand for it and that can't be denied. Gold has a history of maintaining purchasing power and is in its second stage. Manhattan real estate I would say is in its 3rd stage. Bitcoin is in the very beginning of the second stage and has a long way to go before you can convince a 50+ year old to buy it over gold as a store of value.
Gold simply can't be hacked. There was a new exchange for selling cryptocurrency called CoinDash that got hacked for over $7 million during its ICO (Initial Coin Offering) as they were raising funds. The hacker had taken over the website and anyone that investing Ethereum currency was actually depositing it into the hacker's account. 2,130 transactions took place during the first 6 minutes the website was opened for business. The ones who got their ethereum stolen were given tokens till they can resolve the issues.
Gold can be pushed around by central banks who make agreements to sell it as the price goes up, trying to keep it at bay, and it can be fat fingered in thin trading and passed off as a one off error (that is repeated over and over), but no, gold can't be hacked and you won't get token's in return for it if it's stolen. There's insurance for that. I haven't heard of insurance for cryptocurrencies just yet.
Physical gold is the perfect long term hedge for the conservative investor as insurance against a system that is at some point going to have some big trouble ahead. That point is probably when interest rates go north of 4%, but we'll save that analysis for another time. In the meantime, get ready for a fun ride in gold and if you do invest in cryptocurrencies, expect a wild ride there, too.
Disclosure: I am/we are long JNUG.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.