There are no two identical business cycles. Their courses depend on the many independent actions of market participants. Also, each time money flows and spreads out differently in the economy, affecting distinct prices in various ways. However, according to a general pattern, business cycles can be broken down into four stages, during which distinct assets classes, including gold, behave differently. To understand what may happen in the gold market during a possible recession, we have to examine how changes in the business cycle affect the performance of different asset classes.        

So, according to the literature, stock prices mimic rises and falls in the business cycle, while bonds are anti-cyclical instruments. How does it look in detail? Let’s start from recovery. In that phase (or even at trough) stocks – the leading indicator of economic improvement – begin to grow. In the expansion stage, commodities are the best investment. Commodity prices rise because of the increased demand of entrepreneurs and inflation concerns. It is a good moment to sell bonds, because in the next phase interest rates are increased due to higher demand for credits and a rise in inflation expectations. The hike of interest rates and a credit crunch eventually worry equity market investors, who start selling stocks in anticipation of contraction. During recessions, cash is king, while commodity prices fall due to reduction in demand. In the last stage, i.e., depression, bonds perform the best, as the Fed lowers interest rates. Surely, this is a very simplified picture of the business cycle, not taking into account differences among countries (think about commodity exporting countries like Australia) or within asset classes (e.g., dividends stocks vs. growth stocks), however most of the economists agree that, in short, stocks lead commodities, commodities leads bonds and bonds lead stocks.

But where is gold in that picture? Gold generally doesn’t sync with stocks or bonds over the long run. This is why gold is the best asset class during slowdowns. It is a very interesting result, because commodities in general perform best during downturns. This confirms that gold is something more than just a commodity and is considered by investors as a hedge against currency weakness or financial turmoil. This also means that gold is neither pro-cyclical nor anti-cyclical. Therefore, gold investors should neither be afraid of recession nor assume that gold automatically gains if stock market collapses. It is true, as we pointed out in the last Market Overview, that in the last few years gold was negatively correlated with U.S. stocks (see chart 3). However, historically, gold moves independently. In other words, the relationship between gold and stocks has been anything but static. Changes in the correlation between these two asset classes depend mostly on two factors.

Graph 3: Gold price (PM Fixing, green line) and S&P 500 (red line) from 2005 to 2014

First, this relationship depends on how capital flows between asset classes. For example, after the real-estate market went bust in 2007/2008, hot money went into both stock and gold markets, significantly increasing the correlation coefficient between them. So the question is where the outflows from equities or commodities will go. We have to remember that markets are strongly interconnected today. Therefore, a sharp downturn in one asset class can actually pull down another, as investors are forced to raise cash. This is why gold fell immediately after Lehman’s bankruptcy and the stock market collapse. 

Second, the relationship between stocks and gold can be affected by the changes in the greenback’s value. Generally, stocks are negatively correlated with the U.S. dollar. However, during the last few years the greenback often declined in tandem with equities selloffs, e.g., between May 21, 2013 and June 5, 2013. Therefore, gold can gain in the case of stocks falling, but a lot depends, as we thoroughly explained in one of the previous editions of the Market Overview, on the behavior of the U.S. dollar. We are not saying that we are already entering a recession; however this is what just happened to Japan. And stock market investors were clearly nervous in December because of the low oil prices. Gold investors should be simply aware that, according to the business cycle approach to the asset allocation, falling commodity prices often signal the recession. Therefore, they should also know what entering into recession implies for gold market, and understand that equity selloffs do not guarantee gains in gold. A lot of depends on Fed’s monetary policy and the behavior of the U.S. dollar.

Would you like what are the prospects of greenback? We analyze this issue in our last Market Overview report. We provide also Gold & Silver Trading Alerts for traders interested more in the short-term correlations between gold and other asset classes. Sign up for our gold newsletter and stay up-to-date. It’s free and you can unsubscribe anytime.

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Courtesy of Sunshine Profits‘ Market Overview Editor

In October, we alerted traders at SafeHaven to watch gold and silver prices for a development that could signal the market low:

“Traders should be aware that gold and silver are likely to make their respective lows at approximately the same time, possibly even within the same hour. In addition, silver is more susceptible to a drastic spike low, because its price tends to be more volatile, and it represents a thinner market. With silver, a spike low has a chance of reaching the target area shown earlier on the monthly chart. Although the spike low may not feel like a safe buy in the moment, it probably will be a good opportunity to shop for value.”

Our forecast was correct for silver. (Gold did not quite match our expectations, and we address that subject at the end of this post.) We believe silver put in a fairly durable low on the evening of November 30, 2014, and we are now looking for confirmation that price will climb in a move that should last through much of 2015. Factors that lead us to this conclusion are:

• The pattern reflects an apparently complete wave count, which we have been updating here from time to time.

• With the scary spike low of November 30, price poked into the target area we have been mentioning here at SafeHaven since September 2013.

• The low arrived in line with expectations for the dominant 62-week price cycle in precious metals, and the cycle has now moved into its upward phase.

The monthly chart below shows the broad structure of the move down from 2011, as well as the expected upward path from here. The decline took the form of a three-wave move, which could be the entirety of a correction or merely the first part of one. We are provisionally treating the decline as the initial wave A of a lengthier corrective move, which is consistent with our expectation of relatively low interest rates persisting into 2016. Thus, we believe an upward wave B is due as the middle part of the correction. The B wave probably will consist of three parts, although it could become more complex than that.

Our chart presents some likely target resistance levels based on the assumption that November represented a low. The first confirmation that this count is working would be a break and close above the upper channel boundary on the monthly chart, which presently is near $18.00.

As we noted earlier, we expected gold and silver to put in their respective lows at the same time. In examining the wave counts before and after the November low, we have concluded that gold actually did put in its pattern low, but that it was an example of a truncated pattern. All other aspects of the wave count appear complete. Thus, we believe gold also is due to rally for several months or longer, tracing a large and perhaps choppy B wave.

We hope this analysis is helpful in your trading. At our website, you can find a current weekly chart for silver with a more detailed wave count into the low, as well as near-term resistance levels going forward. Also watch for our upcoming quarterly market forecast book, which should be available near the end of January.

“Buy Gold & Silver While It Is Still Available As China To Back Yuan With Gold”

“In almost every orthodox study, the stock market is overbought and overpriced. For instance, the market’s price-to-sales ratio is at an all-time high. The market’s capitalization to GDP ratio (this is Warren Buffet’s favorite indicator) is the second highest in history. The Shiller Cyclically Adjusted PE (CAPE) Ratio for the S&P is 27. That level has been exceeded only twice before in history – in 1929 and 2000. In other words, by almost all orthodox valuations, the current market is dangerously overvalued and way overdue for a correction or a bear market. This is the orthodox way of looking at this market.

Typically, bull markets do not end with overvaluations. They end with emotional extremes. They end at valuations far above what analysts envision. By any accounting, this has been, so far, a great bull market. … The recent back and forth action of the major averages is, in my opinion, laying the groundwork for the coming third and final phase of this bull market. In the coming third phase, I expect all classical valuations to be ignored. I expect money from around the world to pour into the US markets.

Collapsing Commodities

As I write 50 minutes before the close, the Dow is down 232 and the Transports are down 113. This is far from the dreadful 10 percent correction that has been missing in this bull market. The collapse of commodities — oil, copper, and foodstuff — has served to bring about a period of hysterical fear. A 10 percent correction will take the Dow down to roughly 16,200. But so far, a decline of about 600 on the Dow has served to frighten many investors out of their minds and out of the stock market.

I believe what we are seeing now is the preamble of the third phase of this giant bull market. If I had to guess I’d say that the base of the coming third phase could last into June. Thus the bull market will test our patience as we wait for the inevitable third and final phase of the bull market.

Will the Dow complete the long lost 10 percent correction (down to 16,200) before the bull market slips into its final speculative phase? With Europe close to recession and China slumping, foreign money has been going into the US dollar and US stocks. And it’s no wonder, with the US dollar and US stocks comprising the only games in town.

China’s Ascent And A Move To Back Yuan With Gold

I am particularly interested in China, whose GDP is about to take over the US’s GDP. This will make China’s economy the greatest economy the world has ever seen.

China does not want to rule the world. China simply wants to be on par with the US. To do this, China wants its currency to be as strong as or stronger than the US dollar. The world knows that there is nothing behind the US dollar of tangible value. China intends to back its currency, the Yuan with gold. If world commerce is transacted with gold-back Yuan, China will have won a tremendous victory. History show us that gold heads to the most powerful nation. That’s all the proof China needs to show that it’s on par with the United States. Happily, China is not a militaristic state. China wants a voice along with the US in matters that affect the world.

Buy Gold And Silver While It Is Still Available

Once again, I suggest that my subscribers buy gold while the metal is still available. When all fiat currencies are lost, gold will be the last man standing. Sooner or later I believe we will see a panic for physical gold. Just as gold was hated a year ago, it will be loved and wanted a year from now. Buy physical silver and gold while it’s available. Nothing is more loved than the item that was hated a few months ago. Remember, when we enter the new era, amazing discoveries and inventions will emerge. They will come from the United States, the land of the free and the home of the optimist.

Gold is trading well above its 1200 support level at 1206.80. I’m thinking that shortly it will be reintroduced into the world monetary system despite central banks’ fear of gold. In the end it will be used to unite and as a basis for a fairer and a more productive world monetary system. Take the “L” out of gold and you have the word “God,” which I often thought of as more than coincidence.”

To subscribe to Richard Russell’s Dow Theory Letters CLICK HERE.

Here are today’s videos:

Gold Key Upside Breakout Charts Analysis

Crude Oil $60 Is The New Normal Charts Analysis

Dow Wedge Of Doom Charts Analysis

Silver Close But No Breakout Cigar Charts Analysis

GDX Price Gap Of Power Charts Analysis

GDXJ Price Gap Of Power Charts Analysis

Thanks,

Morris

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A few years ago (when the world was very different) veteran mining analyst Jay Taylor told me something that seemed counterintuitive: Deflation can actually be a good thing for the gold and silver mining business — if the prices of mining inputs like oil fall faster than the price of precious metals.

In other words, it’s not inflation or deflation per se that matter, but the distribution of price trends. “With quantitative easing,” said Taylor, “the liquidity being pumped into the system has caused energy and labor costs to rise, which has more than offset higher precious metals prices. Historically, the miners have actually done better in a deflationary environment in which gold and silver are seen as monetary metals and the cost of getting them out of the ground declines due to lower energy and labor.”

So the relationship of gold to the rest of the commodities complex is a good indicator of the mining environment. Gold might be down, but if it’s relatively strong, the mining equation is favorable. How is it today? Improving:

This implies that the cost of mining gold is falling while the price received for each ounce of gold is rising slightly. So margins, which have been squeezed to the point of evaporation for even high-quality miners, might be less horrendous than the markets now expect and (assuming current trends continue) earnings in the second quarter and beyond might exceed expectations. With mining stocks beaten down to historically-low levels, even stable earnings might be enough for a nice rally.

About DollarCollapse.com:

 DollarCollapse.com is managed by John Rubino, co-author, with GoldMoney’s James Turk, of The Money Bubble (DollarCollapse Press, 2014) and The Collapse of the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street (Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He currently writes for CFA Magazine.