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Big Picture Charts

Steve Saville
Posted Nov 1, 2011

Below is an excerpt from a commentary originally posted at www.speculative-investor.com on 23rd October 2011.

Just for a change and on the off chance that we will be able to obtain some useful information by doing so, we'll now take a look at some long-term monthly charts. The blue line on each of these charts is the 12-month moving average.

The first two long-term charts show the S&P500 Index and the US$ gold price. We have put the gold chart immediately below the S&P500 chart to illustrate that secular trends in the gold and equity markets are linked. For example, gold's current secular bull market is linked to the S&P500's current secular bear market. To put it another way, gold is currently in a secular bull market BECAUSE equities are in a secular bear market. The implication is that gold will remain in a secular bull market until the S&P500 becomes under-valued based on traditional valuation metrics.

The long-term chart shows that gold has not experienced a correction of real significance since 2008. Investors should therefore acknowledge the possibility that gold will trade sideways for 1-2 years before resuming its long-term advance.

The next chart shows the long-term performance of the XAU, an index dominated by senior gold producers. Comparing this chart to the gold chart displayed above highlights a point we've made many times in the past, which is that gold-mining stocks, as a group, do not offer long-term leverage to gold bullion's upside. Gold mining stocks are for trading.

Silver's long-term chart reveals a 30-year round trip.

The upside blow-off in the silver market that ended in April of this year created a peak that probably won't be exceeded until at least the year after next, but a lot will depend on the Fed. To be more clear, silver's eventual rise to a new all-time high will probably be driven by another round of rapid monetary inflation.

We are including a chart of Hong Kong's Hang Seng Index (HSI) for two reasons. First, Hong Kong's stock market has led the US stock market at the most important turning points of the past few years. Second, the HSI has spent the past 15 years oscillating between the top and the bottom of a wide upward-sloping channel. The next decline to the bottom of this channel could mark the next major turning point for equities on a global basis.

Copper is sometimes called "Dr. Copper" because trends in its price supposedly indicate the health of the global economy. We don't see it. The idea that an upward trend in the copper price would indicate a strengthening economy isn't logical because real growth causes prices to fall, not rise. Also, the major trends shown on the long-term copper chart (see below) don't appear to be related to trends in real economic growth.

Copper, due to its relative scarcity, benefited greatly from the monetary inflation of the past decade. It should continue to benefit from monetary inflation during the current decade, but to a much lesser extent.

Oil was very expensive at $140/barrel in mid 2008. More than three years and a lot of monetary inflation later, it doesn't look expensive at around $85/barrel.

The bear market in the Dollar Index that began in 2000-2001 took a remarkably similar path to the bear market in the Dollar Index that began in 1985. We have attempted to highlight the similarity on the following monthly chart by numbering the major turning points.

It made sense to be long-term bearish on the Dollar Index during 2000-2007, because during the bulk of this period the US$ was over-valued against the euro on a purchasing power parity basis. Since the final quarter of 2007 it hasn't made sense to be long-term bearish on the Dollar Index because the US$ has, since that time, been either fairly valued or under-valued relative to the euro.

Our final long-term chart shows that the T-Bond has worked its way higher within a well-defined channel over the past 25 years. Despite its steady advance over such a long period, surprisingly few people are bullish on it.

We are long-term bearish on the T-Bond because it is extremely over-valued based on our inflation outlook. However, we have no idea WHEN the valuation-related risk will materialise. We therefore remain disinclined to place a bearish bet.


Steve Saville
email: sas888_hk@yahoo.com
Hong Kong

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