Gold Stocks Ultimate Objective In A World Of Monetary Transition

The world’s monetary system is in a slow motion train wreck! In response gold is emerging from the shadows to become the world’s premier currency once again, and gold stocks are the best proxy to capture this trend. How high could the precious metals stocks go? Shockingly high is what the Barron’s Gold Mining Index (BGMI) is indicating. This index goes back to 1939 and is setting-up for the final leg in the great secular bull market in gold stocks which began in 1960. This long term bull trend really got in gear in 1964 when the US government removed silver from its circulating currency. All silver coins were recalled and replaced with tokens resembling the traditional metal coins. The PM equities were not fooled however, as they responded by embarking on a powerful secular impulse move that lasted until 1980. Bull markets progress through developing stages powered by themes often unforeseen at the beginning of the bull. These newly recognized forces propel them to higher heights as time goes on. In 1971 Nixon and the treasury department reneged on America’s venerated monetary covenant with the world, euphemistically calling it the “closing of the gold window”. Once this sacred standard was gone, the difference between money and credit became blurred and the amount of credit increased in the US by over 50 times within the next 40 years.

This article makes the case that the BGMI is signaling a 17X move from current price. This price objective may seem impossible so I develop big picture case that will drive price to this new order of magnitude. The BGMI is an index dating back to 1939 composing of senior gold and base metal producers. Because of its base metal component. it tends to be more conservative than today’s HUI and GDM, therefore the BGMI actually understates performance relative to the HUI in a gold bull market. Nevertheless, price conversions from the BGMI into the HUI are simply astounding. Below is the period from 1953-current with its price objectives of both the BGMI and HUI. The HUI is projected to reach an objective of 3964-4000. That is a 17 fold return from today's price.

(Click on image to enlarge)

The Technicals

The above chart encapsulates a giant 50 year secular bull market in the gold stocks with a mega-sized bull flag dominating the majority of the range. It’s initial impulse began back in 1960 and had a 20 year 40X run. It then underwent 36 years of consolidation while building out a massive bullish flag formation. It is my working hypothesis that this bull flag is actually a half-way pattern to the much larger complete secular move. If this is so we can expect an impulse move starting at point 4 of equal size as the move from 1960-1980. The implications of this sized move point towards gold playing a role as an anchor in the next monetary system. So far the gold price has not reflected the 50 times increase in credit and base money since the end of Bretten Woods I in 1971. Any new monetary regime that allows the gold price to parallel the growth in credit over the past 40 years would propel the gold stocks well above this bull flag. This monetary development would be the force behind the BGMI completing a measured move of 40X from its early 2016 lows. Gold would be revalued by an order of several magnitudes possibly to $5,000 to $10,000. Later on we will chronicle the macro environment which could lead to this outcome.

The Principle of the Flag Pole and Measured Move

A Bull Flag is a technical pattern designating a strong uptrend. The pole is the impulse move and the flag is a period of consolidation of the move. The bullishness comes from the underlying psychology where despite the strong vertical rally of the pole, price refuses to drop back to the beginning of the pole. Once the consolidation of the flag is over price rises in a powerful move higher measuring the length of the prior flag pole. Below are two examples of this principle. The first is the idealized model and the second is an example from the real world.
We use this model to forecast the price objective of the BGMI.

Bull Flag Pole MM

Flag Pole Real World

The First Leg Up 1960-1980

Let’s drill down and look at the 20 year bull market that makes up the flag pole in the first chart. The period from 1960-80 encompassed several events all related to the unleashing of gold. In 1954 the Swiss removed the price ceiling on gold traded in Switzerland, meanwhile the free market also opened in London in that year. Monetary expansion occurred surreptitiously throughout the 1940’s-1950’s despite the US fixing its gold price. Eventually this created an upward force on gold. As a result, in 1961 eight of the most powerful central banks created the London Gold Pool, with the intent to cap the price at $35. This was an open and admitted operation to prevent the price of gold from rising by selling real bullion into the market.

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Hans Kok 2 years ago Member's comment

As always a great article, Sir Plunger. My compliments. Or in French: Chapeau!