Is the Gold Bottom In? What's next, History, Cycles & Outlook

[00:00:00] Speaker 1: Hi, it's Craig Tapping from Mastering the Markets. There's so much talk on gold right now and whether the bottom is in or not. So I thought I would take you through a bit of a deep dive of gold. What is the history of gold and how does that help us determine where we are now and what we can expect? There's a lot of people that think maybe we're at a macro high and this is similar to the 1980 or the 2011 top and we're not going to go any higher. There's other people that think that the macro low is in and we're going to go to all-time highs before the end of the year. So let's pause. Let's understand gold and if we can understand the history of gold, maybe that can help us to work out what's going to happen from here. So this is the gold monthly chart that I've got up here and obviously we can see the big move that we had from 2022 up to February this year. And since then, you know, February to August, we've had this big correction and we've now got a reaction and the reaction is looking quite strong. And that's where a lot of people are sitting going, is it time to go all in back into gold? So if we zoom out on the monthly and we put this into logarithmic so we can really understand what the history of gold is, I'd really like to start going all the way back to the 1930s. So yeah, the 1900s and start to look at what is the history of gold and what does the history tell us? Because if you really, really want to understand why gold moves, you have to understand what gold used to be versus what it is now. For most of history, gold wasn't an investment. It was money, actual money. The story of how it stopped being money explains every big move that gold has made ever since. And when you go back to the early 1900s, right, the US dollar was basically a receipt. It said the government owed you a fixed amount of gold. And the price back then was $20.67 per ounce. Every major country did something similar because every currency was tied to gold. Exchange rates were locked in too. There was a real physical thing sitting underneath the entire monetary system. Then two world wars happened. Europe needed weapons, they needed fuel, they needed food, and America had it all. So Europe paid the only way it could, in gold. They sent ship after ship filled with gold across the Atlantic to the United States. By 1945, the United States held around two-thirds of all the official gold on the planet. Nobody else came close. And here's a part that surprises people. Back in 1933, just before this move here, the US government made it illegal for ordinary Americans to hold gold. You had to hand your gold in. And they paid you at the official price, which was $20.67. Right? The very next year, 1934, they changed the official price of gold to $35. So they bought all the gold from people at $20 and repriced it to $35. Overnight, the dollar was worth 40% less against gold. And the government pocketed the difference. In 1944, 44 countries met in New Hampshire to decide what the world's money would look like after the war. And because America was sitting on all of that gold, America wrote the rules. The system was simple. The US dollar stayed tied to gold at $35 a barrel. And it held that for 34 years, from 1934 to 1968. This meant that every currency was tied itself to the dollar, and the dollar tied itself to gold. So therefore the dollar became the middleman. And this is very much why the US dollar became the world's reserve currency. It wasn't by accident. It was by design. From 1934 to 1968, the gold price basically didn't move. Was gold generally worth $35 the whole time? No. It probably wasn't. It definitely wasn't. But that was the rule. And by the 1960s, holding that line was starting to get incredibly difficult. Eight central banks around the world had to team up to sell gold into the market every time the price tried to rise. And for about seven years, 1961 to 1968, they managed to do that. And they managed to manipulate the market and hold gold at $35. But eventually it broke. And the system, the world needed dollars to do business. America kept on sending dollars out. But every dollar sent overseas was another claim on gold. And the gold pile wasn't really growing. The most successful, the more successful the system got, the less believable that the promise became. Then America spent heavily in Vietnam. And through the 60s, those dollars piled up faster. France was the first and quietly started turning dollars back into gold. They redeemed the gold back against their US dollars. And others followed. In 1971, Britain lodged a big redemption request. And the US looked at the books and realized it didn't have enough to cover what it owed. So on the 15th of August 1971, Nixon went on television and suspended the ability to swap dollars for gold. He called it temporary. It wasn't temporary. Never came back. And every currency on earth today floats on nothing but confidence. And it all started back on that Sunday night in 1971. So what happened after the anchor came off? Right? What happened? Price went from $35 to $195 between 1970 and 1974. Then after that, there was a massive sell-off. And we went from $195 back to $100. Almost a 50% pullback in the price of gold. That flushed out a huge amount of people. Then the second leg started. And the second leg started, there were two oil shocks. There was inflation ran to about 15%. And savings accounts were paying less than the rate that money was losing value. So holding cash was a guaranteed loss. And that became a really good condition for gold. And gold thrived in that high inflation environment where interest rates were well below inflation. And we talk about real rates. And real rates is the difference between interest rates and inflation. And when interest rates are less than inflation, that's a good opportunity for gold. But when interest rates are higher than inflation, that's not a good position for gold. Because then it pays you to hold cash. It doesn't hold you, pay you to hold gold. Right? And, but what we had in the 1980s is those oil shocks and up to 15% inflation, we saw gold surge incredibly hard and topped out at 875. What followed after that was an absolute change. Paul Wachler came in at, in the Federal Reserve and he what he did was brutally simple. He raised interest rates to over 20%. So inflation was running at 15, but he put interest rates at 20%. And then no longer paid you to hold gold. It paid you to hold cash. So after gold peaked in 1980, and after Paul Wachler put up interest rates to 20%, what we saw was we saw gold drop from 875 down to $250 over a 19 year period. That was, that's a massive bear market for gold that people don't really talk about. Right? 19 years. Wow. So what can we take from all of this? What we can take from this is gold doesn't move on inflation headlines. It moves on two things, real interest rates, right? The difference between inflation and, and what the rates are. And secondly, confidence. Gold is a boat against people running the currency. So when the market trusts the central bank, gold has no job. When, when it doubts the central bank, gold gets really, really busy. What does this mean? And where are we? So if we look at this from a cycle perspective, we can sort of see this massive big cycle. We can call that super cycle one. And then this big correction was super cycle two. And then from here, where are we? And if we understand where we are here, it can sort of point us into understanding where we go. For some people that know Elliott Wave, great. For others, I'm going to try and keep it fairly simple so that you, I can sort of explain it to you, is there are different degrees of corrections. So when, when you got here, and this is a cycle wave one, cycle wave two, cycle wave three, cycle wave four, cycle wave five, that completes a super cycle, which is a higher degree wave one. Then we have that super cycle wave two pullback. And then what we're looking at here is we're looking at these additional cycles. So what we want to see is we, we, what we are in is we're in this super cycle wave three, this red three with the brackets around it. So that, that is what we're looking to complete. And that's going to take some time because, you know, if you look at it, the first super cycle, the first wave one took from 1968 up to 1980. So that took a while. And then the big correction afterwards was 19 years. However, cycle wave three should be much longer in both time and in games than cycle wave one. And that's where we are now. It's important to understand that one big wave three is broken up into smaller components. And when we look at those smaller components, we've got the first cycle wave one, which took place between 1999 or 2000 and topped out at 2011. And we know we had that sort of major, major top in 2011. And after that 2011 top, we actually took four years to correct that gain. And that's what we call the cycle wave two correction. That, that was four years. From there, what we saw was a nice move from late 2015, early 2016, and we topped in 2020. And that, what we call is primary wave one that makes up the cycle wave three. So what we're looking for is five waves to complete cycle wave three. And what we got was we got wave one from 2016 to 2020. We had wave two, which took just over two years from August 2020 to September 2022 to bottom. And then from there, we've had October 2022 through to February this year, we've had primary wave three. So that is where we are now, primary wave four. And what we want to understand is how long should we expect primary wave four to take place and how big a gain or how big of a pullback. So when we look at the pullback, you know, we've, we've dropped 30% from the top and that seems about right, which is very much similar to what previous corrections like this, this wave two correction was, was also just, just short of 30%. But when we look at it in time, we've only been correcting for six months, whereas all previous corrections that we've had, you know, a similar primary correction was two years and one month. So just over two years, the previous correction took four years. Now, if we're looking at the same degree, then the guideline would be this two years is the ideal time for this correction. Now it doesn't mean that it has to be, but there's other things that we look at is every time that we've seen a correction in gold, we've always seen the same pattern. We come down, we think the low is in, we come back to almost the previous high when, and that's where people start to get bullish, but that's where the bigger correction continues. We saw that in 1980, when we start to look at the 19, the 2000 correction, we had a big sell off, we had a bounce back, almost back to the highs, and then we continue to correct for many, many more months or years. We saw it in this little primary correction back in 2008. We put in a low, we bounced back, we put in a high, almost a similar high before we had more sell off. We saw it again in 2011. We put in a nice three-way move. It looked like a low. We then came back and put in a high just short of the previous high before we had more selling off to go. And even in the last correction, which was in 2020, we had a very, very similar pattern again. We put in a low, we had a 20-odd percent pullback. We then spent another year coming back to the previous high before the final leg of that correction. So where are we now? And what can we expect? Well, on the lower timeframe, we are pretty oversold. So to get a bounce here, and when I'm talking lower timeframe, I'm talking the weekly, we, on the weekly timeframe, we pretty oversold. Not necessarily a macro low, but certainly a local low. So what we could see is we could see a move back towards the $5,000, the $5,400, the $5,600. But there is a potential that we will still correct again, put in a double bottom, put in a slightly lower low. But we might take longer for wave four to play out. From a levels perspective, wave four of a higher degree loves to come back to wave four of a lower degree. And that sits between like $3,100 and $3,500. So that is certainly a range that if I hit that, I would feel really confident that that could potentially be a macro low. And we obviously haven't got down to that level yet, we've just below $4,000. So in terms of magnitude of a pullback, that $3,100 to $3,500 is a level that I think would give us a macro low. And in terms of time, I do think that six months only is probably not enough time. Other factors that we look at is if we throw moving averages on, and bearing in mind, I'm still in the monthly chart. And if we look at moving averages, we can see that what I've got in here is the 50, the 100 and the 200 moving average. So this is the average of the last 50 months of price, the last 100 months and 200 months. So when we look at it, like the super cycle type corrections, obviously smashes through all of those moving averages. When we look at the cycle one, which lasted about four years, that was that was between 2011 and 2015. What we can see here is we we went below the 50 month, and we went to low the 100 month moving average. When we look at the primary correction, which is the correction we had from 2020, sorry, from 2020 to 2022, we have pulled back into the 50 month moving average. So where would where would ideal be? Ideal here would be to reset from a moving average perspective and revisit the 50 month moving average. Now the 50 month moving average is currently sitting at 2800, but it's rising every month because obviously price is sitting above it. So if we took a little bit longer for gold to consolidate sideways and form a bit of a base here, this 50 month moving average would move up quite considerably and could potentially get to this 35, 3600 at the same time that price potentially puts in a double bottom or lower. So that is it from a moving average perspective. The other thing I like to look at is RSI. And if we look at RSI and we start to look at the history, when we look at the monthly RSI levels, super cycle bottoms sort of reset all the way down to 21 on the monthly RSI. Cycle bottoms generally come down to 33 on the RSI. And primary bottoms, which is what we're looking for here as a primary wave four, primary wave bottoms generally have come down to 41. So what are we sitting at the moment on the monthly RSI? 62. So have we had enough chance to properly reset momentum, build up enough momentum, get enough oversold on the lower time frame to be able to have a sustainable move up to higher highs? I don't think we have. And we also need to understand that we generally have wave fives. We normally have bearish divergence across the top of wave threes to the top of wave fives. So what that means to us is that we could potentially go up higher in price, but not necessarily take out that high in an RSI. And that's very normal. Like we saw it here, wave three gave us our high and wave five gave us our lower high, even though price went significantly higher. That was bearish divergence. And after bearish divergence, we expect a reset and that would be the top of cycle wave three and a reset into cycle wave four. Right. So that is something that we could look at. But when we look at it from a shorter term perspective and look at it from a Dow theory, so for people that don't quite understand the Elliott wave counts, breaking it down to our theory, what we look at is each cycle has three phases. We have an accumulation, a public participation and an excess. So when we look at the first cycle from 2015 to 2020, this is what we would call our accumulation. When we start to look at the second cycle, the second phase, which is wave three, this is what we refer to as the public participation phase. And that is where everybody gets in. Only smart money gets into accumulation. Nobody gets excited about gold. And from 2016 through to 2020, not many people were talking about gold. But when we look at the public participation, everybody was talking about gold. Everyone was talking about precious metals. And this is what we call the public participation phase. The phase that comes after that is what we call the excess phase. This is where what we call euphoria. This is what what is apps people go absolutely berserk and price in commodities. Generally, this excess phase is the biggest phase, the most parabolic phase. And that is what we have ahead of us. And we don't know at this stage how high it's going to go and and everything else. But we can be sure that this is going to be a pretty, pretty, pretty powerful stage and will likely end somewhere in 2030, 2031. That's the sort of timeline that I have. And that would complete the bigger wave three cycle wave three. And after that, we would have a bigger cycle wave four correction. Now, from a time perspective, maybe a one year to two year correction for this primary wave four feels about right. But once we've finished the cycle wave three, then we're looking at getting a something similar to this four year correction that happened between 2011 and 2015, that would probably happen in the 2030. So maybe from 2032 to 2036, we have this big reset in cycle wave four before we then start the bigger cycle wave five. So there is a huge amount of upside potential in gold. And, you know, I would hate to put a cap on it. But what we need to do is we need to have a little bit of patience, we need to understand that cycles take time to play out cycles take time to digest. And if we start to look at how we we are sitting in in terms of pricing, the opportunity for gold to run again is when real rates are negative, which means that the interest rates from central banks are lower than inflation. So what we're waiting for is we we're waiting for either inflation to go back up to 15% and central banks significantly lagging that inflation with their interest rates, or the balance for inflation to then come down, which is most likely because with AI and automation and everything else, we're going to go into a deflationary environment because the cost of production of everything is going to become cheaper with AI. And when that happens, and we go into a deflationary environment, it's that's when gold is really going to start to move because gold performs best in negative real rate environment. So that's my outlook on gold. Do I do I think that we're going to you know, am I bullish right now? Yes, I am. Am I expecting new new autumn highs before the end of the year? No, I'm not. And I'm more leaning towards that this correction has finished its first phase. And we really are looking for a nice recovery bounce. And this recovery bounce could last several months. You know, it could take us even into the beginning of next year. But then I think there will be another phase of the correction before it completes. And before we actually start to see potentially central banks reducing rates, which might happen late next year, it might happen in 2028. And that might be the catalyst that gold starts its proper fifth wave, its excess phase. And that is where we will look at breakouts. And we'll look at new all time highs on gold and silver and all the other precious metals. So I hope you found that useful. Have a great week. Chat soon. Bye.