The Gold/Silver Bull Market Is Not Over

Summary

• This article will explore the drivers that will push gold/silver prices higher.
• This is the third gold/silver bull market since 1970 and will likely be the most lucrative.
• Technically, both gold and silver are setup to make a big run once they reach $2,000 and $30 respectively.

Let's start with the facts. Gold entered a bull market in July 2019 when it finally exited its 7-year basing channel at $1,370. Here is the weekly gold chart and the channel from 2010 to 2021. Notice the damage that occurred from the 2011 high just below $2,000 to $1,200 in 2013 (40% correction over 18 months). We can see that the bull market clearly ended during that correction in 2013.

Now, let's take a look at the silver weekly chart (see below). You can see that it entered the channel a year later (2014) and exited it a year later (2020). Both had 7-year basing patterns. Those are very powerful and do not generally simply peter out after a 1-year run. Plus, both charts are still extremely strong. It is unlikely that gold or silver will re-enter those channels in 2021.

The bad news is that gold is currently trapped (and silver follows gold) and has been trapped since the November election. Gold likely can't break out until the risk-on trade flips. Investors talk about the importance of the DXY (the dollar index) and negative real interest rates, and these do impact the price of gold. But the only true factor that determines bull markets is the fear-trade. And the fear-trade shows itself only one way, which is called a risk-off trade.

Since the November election, we have been in a risk-on trade (where investors prefer stocks). What this means is that investors are bullish stocks and lack fear of a correction. Thus, their sentiment is very high for risky stocks and very low for gold. They are buying stocks that have been trending. In fact, the stock market indexes all are near their ATHs. Below is the S&P 500 daily for the last year. We did have two short corrections in September and October, but they were quickly bought.

Notice that since the last small correction in October, the S&P has done nothing except trend higher. This state of affairs has left gold stuck and it can't get a bid. In fact, it won't get a bid from big money until this strong risk-on trade flips to risk-off. Sure, it can rise on the margins, but it won't make a run at $2,000 until a risk-off trade is trending.

As a gold/silver investor, I don't care about $1,800 gold or even $1,900 gold. I want to get above $2,000 and make a run at an ATH, which I expect to get taken out. That is my first target. My second target is $2,500, and then finally $3,000. Everything above this is gravy. If we get to $3,000 gold, then the miners should fly. That is the trade I am position for, so yes, I am talking my book. I have skin in the game.

While both the gold and silver charts are still very strong, that doesn't mean they can't fall lower. For gold, we have to fall all the way to $1,472 to reach the 200 WMA. The bad news is that we actually might do just that. Once the stock market finally corrects, it will likely take everything down, including gold, silver, and the miners.

Once $1,800 was taken out, gold lost its support. Now it is dangling down below $1,700 (the close today was $1,684). I think we have to assume that it is going lower. All we can do is wait for the stock market to correct and the risk-on trade to end. The last time we had a risk-off trade was last summer when gold was trending. The same thing could repeat this summer, although that is only a possibility.

Once the stock market corrects, I have a feeling gold will catch a bid just like it did last March. Gold crashed to $1,450 on March 16th and then immediately started trending into the summer. This time, I don’t think it will retest $1450, but it could get close. My expectation is that investors are nervous and should run to gold before $1,450, perhaps somewhere between $1,550 and $1,620.

I don’t think this is 2013 all over again, where gold begins to descend from an ATH and keeps going down. The crash in gold from 2013 to 2015 was epic, but it occurred during an economic recovery. It is possible we could be entering an economic recovery and MMT will succeed, but it doesn’t feel that way to me.

The difference between now and 2013 is that the stock market had just made an ATH, and the recovery was just beginning. This time the stock market has been making ATH’s for eight years, and the economy is on shaky ground because of COVID. Plus, you have inflation worries because of the massive MMT printing. And the dollar is nowhere near as strong as it was back in 2013.

I could be wrong, but I feel confident that the following scenario will play out: the stock market will correct, the risk-on trade will flip to a risk-off trade, and the gold bull market will resume. The only thing I am not confident about is the time frame. With MMT, the Fed could prevent another significant correction for quite a while.

Biden is going to raise taxes this year, which is not going to be a business-friendly policy. I think this is being ignored by the market. I think Biden is essentially scrapping the supply-side economic policies that we have followed since the Reagan Era. These policies basically entailed doing no harm to corporations and small businesses (which are essentially small corporations from a tax standpoint) and doing whatever was necessary to support them. In fact, the last time the corporate tax rate was raised was in the 1940s. Reagan dropped the corporate tax rate to 35% and Trump to 21%.

Since Reagan, no administration has attacked corporations and small businesses. Obama talked about it during his state of the union addresses, but he never actually did anything to hurt corporations (he didn’t have the votes in the Senate for his last six years in office). In fact, he was a globalist, which is essentially pro-free-trade and anti-worker. He tried to get TPP passed (Trans-Pacific Partnership), which was a major free-trade law with Asia.

Biden is taking a big risk by going against corporations. He stopped the Keystone pipeline, which eliminated 11,000 jobs. He stopped drilling on federal lands, eliminating thousands more. He has not exactly been business-friendly so far, and that seems to be his aim. Now he wants to raise corporate taxes. Will this work? Can America afford to take this risk?

I’ve been following politics and the economy closely since 1978 when I graduated from high school. So, I am very familiar with the Reagan Era policies and everything that came after. America began living off of debt during the Reagan Era. When he came into office, the national debt was less than $1 trillion. When he left office, it has ballooned to $2.7 trillion. He used debt to boost the economy and our standard of living, and we have been doing the same thing ever since.

What Reagan did economically appeared to have worked, so we continued using it. The 1990s were very strong economically for the U.S., so the Republicans decided to balance the budget (Clinton was President, but he was not the force behind it), which they accomplished in the last 1990s. But that would not have occurred without the strong economy.

In my opinion, the 1990s was the heyday economically for the U.S. I think we peaked around 1998. Since then, we have needed more and more debt to maintain our standard of living. Now we have adopted MMT, which we borrowed from the Japanese. Ironically, while we were balancing our budget in the 1990s, the Japanese were using MMT to print money like drunken sailors.

I remember reading numerous articles in the 1990s about how the Japanese were making a big mistake borrowing so much money. Now we are doing the same thing. The Japanese central bank was the first one to expand its balance sheet to huge proportions after 1990. The Fed’s balance sheet is now $7.4 trillion. How big will it get? At what point does anyone care?

The reason why I think the stock market will correct soon and gold will reverse and head higher is because we are not Japan. There are three significant differences. First, we have the global reserve currency. When we debase it by printing trillions, we impact other countries. In effect, we are exporting dollars, which are getting cheaper and cheaper. Essentially, we are exporting inflation. We are abusing our position and not respecting others.

Ironically, Southeast Asia is taking the brunt of our careless policies because that is where we buy most of our goods. Asian cultures are big on showing respect and have a concept called face. Our lack of showing respect will catch up to us. As China recently said in a summit in Alaska, the U.S. no longer negotiates from a place of strength.

The second difference is that Japan funds its debt internally. Thus, they don’t have the risk of an outside country dumping their debt. Third, they are a mercantilist economy. This has the effect of supporting the value of their currency.

Because of these differences, America is playing a dangerous game. We don’t have the luxury of debasing the dollar and getting away with it to the extent that Japan has. Incredibly, I have heard economists, such as Stephanie Kelton, say debt is actually a good thing! And that as long as we keep our economic system funded with liquidity (via printing), debt will not be a problem.

This is total fantasy because the Achilles heel of MMT is inflation. Once inflation arises, the economy is pretty much toast because inflation destroys wealth and creates poverty. The book The Mandibles (highly recommended) was a good expose on the dangers of inflation. Once you get high inflation, it is very difficult to prevent a severe economic crisis, and the damage can be immense.

I could be wrong, and MMT could allow the U.S. to remain in its dominant economic position for many more years to come. If this happens, gold (and silver) could remain stagnate for several more years. From 2013 to 2020, gold had one short rally in 2016. It stagnated for these seven years because the U.S. economy was trending higher, as was the stock market, where investors preferred to put their money. Sentiment for gold waned.

This could be the beginning of another stagnate period for gold after it reached an ATH of $2,075 in August. But, again, this is not my expectation. I think the stock market will correct at least 10% in Q2 or Q3, which will flip the risk-on trade, and gold will finally get a bid, pushing it a new ATH. We will have to wait and see what happens.

In the meantime, I have been creating a list of stocks to buy the dip. My list is up to about 15 stocks. Once the stock market corrects 10%, I plan to buy the dip and load up on more miners.

I mentioned before that I am expecting a bottom for gold around $1,550 to $1,620. For silver, my target is $18.50 to $22. For the HUI, my target is 200 to 225.

I want to emphasize that once gold and silver break out to $2,000/$30, the bull market will likely resume. This next run should be historic. I have no idea when it will begin, and we might have to wait more than a year. The key will be how the markets respond to MMT. Can we print our way to prosperity? We’re about to find out.

I need to include two important factors that will impinge the gold price. The first is the DXY. Currently, it is trending up and showing strength (see chart below). If it drops below 88, it will likely trend down to 80. That is my expectation, and if it occurs, it should coincide with a new ATH in gold. Conversely, if the DXY can remain above 90, it might not reach an ATH.

The second factor is inflation. Already we are seeing strong signs of inflation, such as higher commodity prices. Copper is at $4 per lb, oil is at $60 per bbl, and lumber prices have exploded. Plus, the 10-year Treasury Bond has been trending up, reaching 1.73% today. If it reaches 2%, we could easily see huge ramifications, including a slowdown in housing, along with a correction in the stock market.

Can inflation be contained? That is the big question, and I think the answer is no. If it is contained, then we could have a goldilocks economy, with steady growth and low inflation. If that happens, then we won’t see $2000 gold or $30 silver this year. But there is always 2022, and at some point, the bull market in precious metals will resume. My guess is that it is coming sooner rather than later.