Gold, BRICS, Russia & 40-Year Cycle

12/01/14 INSIIDE Track: Outlook 2015–2017 – Deflationary Trough

“Recent issues have discussed the Synergy of Synergy of cycles in 2013–2017 (lasting into 2021) and, in particular, in 2015–2016.  When discussing these topics, it is like walking a tightrope – attempting to balance the severity & urgency of what so many factors are portending with the appropriate timing & rationality of that discussion.

In other words, it is a challenge to warn without creating undue worry (since proactive thinking & actions are the ultimate resource in preparing for this).  That is why I prefer to be viewed as an ‘Aware-ist’, NOT an Alarmist.

Most individuals purchase fire, flood and life insurance because they are aware of the realities of life and have proactively & rationally decided that these purchases are worth the cost to protect against a rare occurrence; an anomaly when considered in the context of normal day-to-day life; a once-in-a-lifetime event.  In that context, there are times when these ‘rare’ events are a higher risk.

2013–2014 was the preliminary stage – when the groundwork was expected to be laid.  Events in Russia, with the BRICS, in Europe, et al, have fulfilled that.

2015–2016 is expected to see an increase in the intensity of events.  Along with that, many markets are expected to reverse recent, 3–5 year trends.

While much of these discussions focus on specifics & concrete analysis – specific cycles, specific markets, specific nations, etc. – it is important to periodically step back & discuss some of the general aspects of this analysis.

One of the primary reasons for doing so is the frequency of false assumptions that appear to be drawn – based on comments & inquiries I receive.  In almost every case, there are superfluous connections drawn & conclusions made… often to fit a preconceived notion.  In reality, each market and each cycle should first be viewed as independently and as simply as is possible… before making any correlations or associations.  Treat each market on its own.

Occam’s Razor…

This is where Occam’s Razor initially applies.  Paraphrased, William of Ockham’s principle for problem-solving explains that when faced with competing hypotheses, the one with the fewest assumptions should be selected. (There is no guarantee it will be right, but it should be the primary choice.)

My Axiom of Market Correlation attempts to express a similar principle… in the markets.  If it were distilled to one key point, it would be to treat each market’s analysis on its own.  Once that has been accomplished – and ONLY at that point – THEN associations & correlations can be applied.

Even then, however, it is the correlations that should be discarded before the analysis… if something does not unfold as anticipated.

If each market has been analyzed on its own, and the corresponding/resulting conclusions drawn, do not abandon the outlook for ‘market b’ if ‘market a’ is not doing exactly what was anticipated.  In many cases, a new – or temporary – correlation will take precedence and influence one market different than what was expected… or what had become commonplace when viewing both markets.

Big Picture

In order to illustrate this, let’s review the general outlook for the 2010’s:

— Dollar Index cycles bottomed in 2008 & 2011 and were expected to spur an overall rebound into mid-decade (even as Dollar fundamental factors were forecast to be deteriorating during this time).  A very consistent, 38–40 month cycle projected an intervening Dollar Index peak in mid-2012 and a more significant one for late-2015.

— Many commodity/inflationary markets would surge into 2011 and set multi-year peaks at that time – led by Gold & Silver.  Those peaks were/are likely to last for 3–5 years or longer and create subsequent corrections or crashes (as Dollar and other factors are slowly felt).

— Those subsequent declines were/are likely to last into mid-decade, with 2015 being the most synergistic year for Major (3-5 year or longer) bottoms.  As part of those declines, the sharpest sell-offs were expected into 2013 – the midpoint of the overall down cycle.  The anticipated 2015 trough was/is also expected to coincide with the onset of a new Food Crisis (in line with the 40-Year Cycle).

— There were some key markets – most notably Stock Indices & Livestock – that were poised to continue higher in the face of these deflationary moves… extending their inflationary advances into 2014 (Stock Indices) and2014/2015 (Cattle).  In the case of Livestock, there is a chance that this could also play into a Food Crisis.

— Overlapping these cycles, Bonds & Notes had major cycles peaking in 2012 (even though there is a moderate chance for a retest of those highs by/in mid-2015).  That also means that longer-term interest rates – or at least the perception & expectation of them – would bottom in that period.

— In the midst of all of this, there are individual markets – like Lumber – that have competing factors & influences, creating a volatile whipsaw of activity in response to those catalysts.

2015–2016

In many cases, these analyses seemed to fly in the face of conventional wisdom.  In even more cases, ‘normal’ correlations were turned upside down… at least for a period of time.

In the case of the 2011 cycles, different commodities had different cycles – peaking in 1Q 2011 (Copper, Cotton, Sugar), 2Q 2011 (Silver, Crude, Coffee) & 3Q 2011 (Gold).  That was expected to trigger multi-year declines – coinciding with a contrasting rally in the Dollar Index – masking the real problem for a final time.

As these markets were embarking on multi-year declines (many losing more than 50% of their peak value in just a couple years), others were surging into unprecedented territory – like Soybeans (in 2012).  Most of them should bottom in 2015 (partially due to Dollar Index cycles).  And then comes 2016 – The Golden Year.

The Healthiest Horse…

As discussed for over a decade, the outlook for the Dollar has to be viewed from two perspectives:

1 – The Dollar Index (a measure of the Dollar’s value against other currencies).

2 – Gold (a measure of the Dollar’s intrinsic and lasting value).

Depending on which perspective one takes, the interpretation of cycles can vary.  In the end, however, the final result does not change.  But, there are periods of serious discrepancy – often lasting a couple years… like 2008–2011.  The Dollar Index completed a 7-year decline in early-2008 – at the same time Gold was setting a 1-2 year peak.  In theory, if the Dollar had bottomed then Gold had topped.

But, this is a perfect example of where the two perspectives diverge.  Since its March/April 2008 low, the Dollar Index has never traded lower.  In contrast, Gold’s March 2008 high was an important peak – that held for about 18 months – BUT it was LESS than 50% of Gold’s 1999–2011 overall gain.

The majority of Gold’s gain – from a late-2008 bottom below $700 to a Sept. 2011 peak at ~$1920 – came in a 3-year period.  During that period, the Dollar Index traded sideways to up, never setting new lows.  So, anyone viewing the Dollar’s value via the Dollar Index saw a stable currency generating multiple 15-20% advances.  Anyone viewing it through a golden lens saw the Dollar losing more value.

In other words, the Dollar has been the ‘healthiest horse in the glue factory’.  And that metaphor might be more appropriate than is currently realized if the ‘glue factory’ is where all of the fiat currencies are being herded.  Another way of looking at it – through a cyclic lens – is that the Dollar Index, since 1985, has experienced two major 7-year ‘droughts’.  The biggest drop was from 1985–1992.  The second was from 2001–2008.

In the midst of those declines, the Dollar Index did experience a 50% gain in value during the ~7-year period from early-1995–early-2002 (when it set a double top).  And prior to 1985, the Dollar Index experienced a previous, ~7-year rally from 1978–1985.  1978–1980 was very much like 2008–2011 in which Gold saw its biggest, parabolic surge AFTER the Dollar Index had already bottomed.

Gold’s 40-Year Cycle

The Dollar Index is in the midst of what is expected to be its third, 7-year advance – from 2008–2015… a precise 30-Year Cycle from the 1978–1985 advance.  The more intriguing factor is how this dovetails with the more significant 40-Year Cycle in the actual Dollar… viewed through the golden lens.

1971–1976 was a momentous time for the relationship between Gold and the US Dollar.  It was the final, tumultuous period immediately following the official divorce between the two.  There had been multiple ‘trial separations’ but this one would stick!  1976 witnessed the certificate of divorce known as the Jamaica Accord.

40 years later, Gold was forecast to see a Major, multi-year peak in 2011 followed by a sharp drop into late-2013 and an overall decline into mid-2015.  2016 is expected to see a dramatic shift – the culmination of that 40-Year Cycle – or ‘period of testing’ from when the Dollar officially divorced Gold.

Tip of the Iceberg

And, here again, the view from above the surface of the water – where the Dollar Index is viewed as the entire reflection of the Dollar’s value – everything looks relatively fine.  Beneath the surface is an entirely different perspective as the world rushes to repatriate their Gold – even as unknowing investors revel in the Dollar’s new found ‘strength’.

National Cycles Updated

As discussed last month, the global move to repatriate Gold began during the precise month that Gold was peaking – in August 2011.  More significant, from a cycle basis, the global move to bring Gold home – in most cases, that meant taking it out of the hands of American banks, etc. – began EXACTLY 40 years of testing from when America shut the Gold window in August 1971.

As I have explained countless times before, the fulfillment of a momentous cycle often begins VERY subtly.  No one notices and it appears as though that cycle was meaningless.     Then, after the first 5-10% (or more) of the new cycle unfolds and a transition is finally noticed, it is usually traced back to the precise cycle transition.

When the global move to repatriate Gold hits its parabolic stage (2016? 2017?…), analysts will probably view 2011 as a watershed time – when the Gold buying of 1999–2011 shifted to a more tangible ’taking delivery’ of those purchases.  And that reality was reinforced during the past month…

According to the World Gold Council, Russia was the largest global Gold buyer in 3Q 2014… and has tripled their Gold holdings over the past decade.  Many believe this is preparing for a drawn-out economic war with the West (over Ukraine, etc.)… which reinforces the oft-discussed topic of (Russian) Bears Begetting (equity) Bears.”

40-Year Cycles in Gold, Dollar, Stock Market & Commodities take center stage in 2015 (& 2016)!