Main picture here is from Crescat capital, I did not create – please visit them!!
If you have ever used weather forecasting, you know it is imprecise. The 10 day forecast is a joke, to be honest. Maybe they can tell a heat wave is coming based off of a several day move from the west to the east. However, you look on your hourly app and it might say 30% chance of rain in the next hour, but you see storm clouds that are certainly going to rain on you! Likewise, you buy tickets for an outdoor concert two days from now based on clear skies in your forecast. It rains. You are upset.
The same concepts are true for just about anyone you follow on Twitter. Including me. The closer time you come to an event, the better information you have. I like to think of all of this stuff like the buttons and dials on an airplane. While all of us are not Jim Forsythe who could actually FLY the plane, we can use this as an analogy to show the complexity of all of the items that go into forecasting metals.
I’m writing this because there’s two leading scenarios coming with a crash of the stock market.
- Cliff dive (Cat 5 hurricane)
- Arm wrestling for months or years before rollover (bad thunderstorm)
Let’s examine a few things that go into the predictions for gold to then give a back drop to the possible weather forecasts above. This is not all inclusive, but just some of the things I can think of off of the top of my head.
- Real interest rates – the more negative the better.
- Dollar (DXY index) – as this decreases, it takes more of these units to buy things, especially imports.
- Geopolitical tension – fear can drive gold up
- Stock market – gold can run with the stock market or inverse to it
- Risk on/risk off sentiment
- Basel 3 – reduction in “paper” gold (and silver)
- supply/demand issues (more focused with silver)
- bank paper positioning – they may not “allow” price moves in short term, can get overwhelmed in long term
- central bank gold buying
- pension fund/institutional buying
- inflation fears – acts as a hedge
- technical charts – investor behavior patterns
So there may be a lot more things I’m not mentioning here, and depending on the day, hour, minute, temperature outside, relative humidity, and the color tie a blue elephant wears – one of these might be the most important item of the day. Others might be irrelevant – that day.
Over the long term, you can clearly see the best correlations go to real rates and movements with/against the DXY.
What a strategist or analyst might be able to do is try and string a forecast of events that could lead to things happening, which might support price forecasts. One rookie move I did in my Palisades video was put a timeline to events. Bad move, Nate. One thing of interest happened. I was right and wrong at the same time.
Schroedinger’s cat of predictions.
How can you be right and wrong at the same time?
Around the time of my video, I had a series of events that would happen. Get this. I feel it SHOULD have happened – in the timeline I laid out. All of us play by a set of rules and laws. They don’t. So a certain ETF told everyone that they added 113m oz in 3 days. Most analysts out there balked at it, and one even called them to confirm and they said that all the metals were added at the end of each day and the woman on the other end confirmed all metal was in place at the end of each day. AS that was happening, this ETF then changed their prospectus in the darkness of night to say…”meh…all the silver might not be here” and didn’t tell anyone. Ronan Manly discovered this and wrote detailed articles about it. A month or so later, the LBMA came out and said there was a “reporting error” by one of their members of 110m oz, and it was now corrected. Apparently, the financial officer for that ETF then resigned on the last day of the quarter rather than sign the quarterly docs. All of this LOOKS like there may be a fine of a few million dollars a few years from now when all is said and done.
What SHOULD have happened was newspaper headlines, worldwide, would show silver spiking 100% in a week as this bank then tried to source 110m on the OTC. That never happened because they chose not to add that metal, apparently, and then the price never spiked – as it should have.
Thus my lottery ticket options on that ETF went to $0 and potentially cost me $750k in profits. Someday, when the lawsuits come out on this, my name will be attached to it and I’ll collect my profits plus interest and penalties then. So…..there’s a mil or two I’m due in a few years. It pays to have a crystal ball sometimes!
What scares me and many the most is another March 2020 event. The black swan, of sorts. All of the writing is on the wall for another such event, as you can see the world trying to lock down, yet again. You are now starting to see turmoil on “vaccine passports” worldwide, with a lot of the protests in France getting big. There could also be a lot of civil unrest and violent protests if governments push a notion that they need to inject you with something that you feel you don’t need.
IF another March 2020 event was to happen, it would make sense to be in 100% cash. Let the crash happen, then afterwards, buy back in fully and watch everything reflate again and get stupid rich. However, it’s sort of a greed play, right? Take your pile of cash now and grow it by 2-4x on a reflation? It’s also a fear play at the same time because you worry of a monster crash.
IF any one of us had credible intel THIS event were to happen tomorrow, we’d get the hell out today.
However, have you considered what Michael Oliver called on previous stock market crashes? He called them arm wrestling events. Meaning, we have come up high, then we stall out – and as we stall out, people are throwing money at it, and others are selling off – it goes sideways, then comes down, tries to pull back up, and fails. During an event like this, you may have a lot of people moving to gold and silver during this event.
If you are fully deployed to gold, silver, and the miners, you may see your assets significantly increase in value AS the rest of the broader market grinds down over 2 years. In this event, had you fully been in cash, you would have missed the up move. Additionally, WITH inflation, you perhaps lost 10% of your purchasing power on top of it.
I agree with a lot of the guys who think we are about to deflate the stock market as a whole. Where I differ from most of them is I believe we haven’t been in 40 years of deflation, and then suddenly go to hyper inflation. This is lunacy. The hyper inflation is caused by….surprise…more money in the system split amongst a finite amount of goods and services. This is your classic text book definition.
What makes the most sense, to ME, is that for the last 40 years, the government has artificially rigged the inflation numbers low. The CPI has been forced low. This has suppressed the proper counting of REAL inflation that has been going on. For example, if the government has told us for 40 years that inflation has been 2%, but in reality, it has been 5%, the deflationists point to macro factors that support their narratives. However, this discounts the fact that these artificially low inflation rates allowed the bonds/treasurys to then decline in rates.
This had the effect, for 40 years, of artificially inflating bond prices. Holders of these bonds bought them at a high price for stability because they trusted the numbers of low inflation.
I feel when this narrative of inflation sticks, that people will run from these anticipating higher rates, and thus lower prices. The “safety” of bonds to preserve and grow money will evaporate overnight.
From what I understand the debt markets are $200T?
My contention is, collectively, there is a run for the door to get to cash to get some sort of value. Interestingly enough, in a situation with high inflation, cash loses value. So where do you put it? Gold.
Whether you think inflation OR deflation got us here…here we are folks. Over valued debt. I wrote that this is the pin that will pop the bubble.
But the question then is….what happens?
Interest rates go up?
They will go up, to a point, and then the fed put will be in effect and that’s where you will “officially” see Yield Curve Control. This comports with David Hunter’s philosophy with what’s about to happen.
We are in 40 years of inflation, and then suddenly, a great deflation happens due to the VALUE of the bonds shrinking – sending rates higher. This then goes into gold and gold VALUE goes higher, by a lot.
What is also of interest is that this cash on the sidelines will need to go into something. so the great sell off will happen. This could also be zombie S&P 500 companies.
The question is, is this is cliff dive down, or is it the arm wrestle over a year? Could it be a sideways movement in prices while inflation runs into double digits?
NO ONE KNOWS. NO ONE.
However, I’m leaning more now to the arm wrestle than the cliff drop. In this arm wrestle, it will be “risk off”. Traditionally, risk off means you go into bonds or cash. However, this event is CAUSED by getting OUT OF BONDS and GETTING OUT OF CASH.
If you are doing a risk off, of risk off items, does that mean a double negative and you should be risk on? No. But it’s tempting.
If you look at risk off asset classes, there gold sits alone. By now, the elite class should be understanding what is going on, and by now, the financial advisors of the world who had people in .5% gold may take them to 3% or 5% gold. That is potentially a 10x monetary investment in gold from wealthy and institutional investors.
At the same time the paper gold market is supposedly being wound down.
I have discussed different ideas to play this in that link and in this one, but the arm wrestling idea below has me contemplating keeping more in gold/silver miners.
Cliff drop – Cat 5 hurricane
This scenario seems to have gold, silver, and the miners selling off with everything in a mad scramble to cash. This sends the DXY to the moon. But if the trigger to this is high interest rates expected in high inflation, why would you run to cash? At first, the safety is cash to liquidate. This also suggests what David Hunter is saying where the bells will go off and thus people may then eventually run back to gold and silver.
IF you believe this narrative, it would stand to reason that at some point you are going to cash, or mostly cash. IF you get near his S&P targets and the like, you have to be sweating, and it may not be worth it to take that last 5% upside for an 85% downside risk.
Arm wrestling – bad thunderstorm
I am starting to lean toward the Oliver camp of the arm wrestling down. What if this “bust” that Hunter was talking about? What if he’s right about the end point of the 65-80% deflation, but the means in which it goes down is not a cliff drop, but an arm wrestling match for 12-24 months? I’d contend in that case, gold and silver would do tremendously well as stocks were falling. To get all to cash here might be silly because you might miss the entire move up to $3000-$5000?
I’d contend in this situation you will start to see tech rollover into gold/silver and mining stocks. It might sound silly at first, but this is the type of thing I’d be looking at if I were a fund manager, and I’d like to be first to the party to catch those massive gains when everyone else shows up.
I got the below from Tavi Costa’s Twitter feed. He’s becoming someone who I agree with a lot these days, and his charts are simple to understand and can influence the masses. IF there is no cliff drop, but a rollover, where do you think billionaires might tuck some money away at?
If we look at the last time our country faced massive inflation, you have to look at the 1970s. That entire decade you were seeing crazy inflation numbers.
Now – you also saw inflation numbers produce higher interest rates as a cooling effect to the economy. The high inflation signals overheating, and thus the interest rates trail the inflation.
What did the 10 year do during this time?
You can see the 10yr in 1981 at 15+%? Interestingly, I cannot seem to easily get the data for the 10Yr on trading view now. Or Market Watch. It’s as if they don’t want us looking up inflation era numbers?
However, I do have a 50 year or so chart I did months ago before they took this data out.
Just look at how rates went up in the 1970s to match the inflation hikes. Why is that?
Remember, that the VALUE of the treasury or bond is INVERSE to the rate. As rates increase, the value goes down. What you saw during inflation in the 1970s was people dropping the low yield item to chase gold to at least keep their wealth. The 10yr promised to give you less back in spending power, and gold was promising to keep your wealth intact.
THIS is the environment I see brewing. Also keep in mind, we are dealing with 40 years straight of the 10yr going down during a supposed “deflationary” time. If you really think about what you are seeing, you are seeing the VALUE of these treasury notes increasing over 40 years.
On false data. This is why I think we are about to see “transitory deflation” where the bond markets deflate, causing everything else to seize up.
What I’m thinking here is that this debt party is over, and those who hold the 10yr notes are about to be bag holders. While I covered this in the pin that pops the bubble blog, it’s also of interest to jump into the minds of bond holders in the 1970s for a moment. Look at those increases. This is the market selling bonds/notes.
All of the fund managers who navigated inflation in the 1970s are now retired.
I beg of you, IF there’s a risk off scenario, where do you go?
- reverse plays on stocks, etc
If you are dealing with a situation that is inflation-centered, you are literally seeing your treasury notes going down in value, perhaps for a decade. If you are going into cash into high inflation, you are looking at perhaps 5-10% loss of spending power per year. To me, it almost seems like gold is the only one left in the room.
In this risk off scenario, you’d also be a fool to short the market in any way, shape, or form, because it is also possible that loose cash will chase blue chip stocks that may survive any kind of crisis. While the markets as a whole may decline (or perhaps crappy companies die while blue chips thrive), it’s also possible during a highly inflationary environment that the NOMINAL VALUE goes sideways as more cash hits the markets – where the VALUE of the stocks decreases over time due to inflation. Meaning, your reverse plays shorting the market may also fail.
To me, gold has been the first and only choice to go to. Stocks may rise, sure, but with the increasing possibility of rates to explode up during inflation, the “risk off” scenario points to gold first. Silver may act as an industrial metal at first during the arm wrestling down, but I feel this will be a bull flag on the cup and handle that will then explode up. This is where I can see silver hitting $55-$60, then the pull back to $30 over 6-12 months with the bull flag – then we really run to $100+.
Gold may continue up until the market finally digests inflation and then gold may go from $3000 to $2200 or so, but the commodities market will be on fire for the last 7 years of this decade. All of the uncertainty with currencies, political tensions, lock downs, personal rights being lost – gold will be a flight to safety during this time.
You have to decide for yourself – do you see a cliff drop or arm wrestling competition? If YOU see a cliff drop, this means you probably are looking for signs to get to mostly cash. IF you are looking at an arm wrestling match, you may lean towards being fully deployed.
No one can advise you on how to handle the upcoming debt bomb. This will mostly likely be a combination of the two, where you have a 10% “accident” in the stock market, but Fed responds with money bombers. That’s your cliff drop. Perhaps then for 12-24 months you have the arm wrestling, which would then complete Hunter’s 80% correction.
How do you see this playing out? What events do you see as a catalyst? Could COVID trigger more lockdowns in August/Sept to create another March 2020? Did March 2020 happen to that depth only because we didn’t have the QE tools in place that we do now to respond quickly? How deep could a correction go? What are big firms thinking?
Stay tuned to YouTube, this show cannot be beat.
July 29, 2021 at 1:11 pm
Hi Nate – Thanks for another great article. Question – I agree gold makes sense in an “arm wrestling” down environment. But regarding shorting of the market (i.e S&P) and people throwing money at big companies as “risk off” – could you not just short the NASDAQ (SQQQ) which doesn’t have nearly the same number of big companies and may really accelerate downward?
July 29, 2021 at 1:18 pm
Absolutely. However, I also don’t short as a general rule so I’ve more or less taken this off of my table. You can lose ‘infinite money’ with shorting and I don’t really like that concept. Since my primary focus is ‘safety’ and ‘risk off’ I did not consider shorting a major index as ‘risk off’. It is possible this ‘melt up’ scenario goes up another 1-4 years and takes gold with it like stocks 2001-2008. In that case you win with gold and get crushed on the short of nasdaq. I have to be careful not to advise people and point you to your own financial advisor. It’s possible they may have specific funds with a portion allocated towards shorts or puts in these markets as diversification. I’m much more prone to bet on a horse to win like gold as opposed to betting on a horse to lose.
July 30, 2021 at 5:40 am
“Have cash on-hand. Volatility is inevitable. People think if they have gold stocks they’ll be OK in a precipitous decline. In the near-term they won’t. What comes back are good assets. Holding gold stocks is not the same as holding cash. Holding gold is good but volatile liquidity” – Rick Rule
August 2, 2021 at 1:05 am
Great stuff Nate! One additional option I might make is “hold through it all” for the miners. If the market rolls over 12-24 months, you theoretically make a killing. If the market black swans, we all expect (is that echo chamber of group think dangerous) a v-shaped recovery like in 2020 – but markets aren’t ever exactly alike. By simply holding (and for those earlier investors, scaling in to take profits while still letting a lot ride) your most significant risk is share dilution, but imo this risk is attenuated if the v-recovery occurs within a year as we hope and IF you’ve chosen miner equities that have decent cash reserves and fully funded drilling/building programs until Q2 2022 (there’s a lot that do).
Of related interest is that of drillers. Quinten Henneigh talks at length about there being a shortage of drillers to service miner’s drilling programs. Same narrative with assay labs – everyone is behind. This delays drill results which ST impacts *some* miner stock prices and may MT-LT force them to dip into reserves if they didn’t have the foresight to secure drills earlier in the season.