Is Oil About To Follow Gold Down? This Chart Says It Will. [EOG ...

Is Oil About To Follow Gold Down? This Chart Says It Will. [EOG ...
Calafia Beach Pundit: 10 charts to watch
Barrick Gold: Have We Seen The Bottom? - Seeking Alpha
Gold Correction Isn't Over, But Gold Price Heading to $20,000 :: The ...

Posted: 06 Dec 2013 03:47 PM PST

Anybody who follows financial markets knows the direction of gold prices over the past year. This is not a secret. But what seems to be lost or hidden somewhere in the deep recesses of investors short memories is where EVERYONE "knew" that gold was going just one short year ago. Yes, most people have long forgotten their fail-safe plans to strike it big with their gold stocks and gold ETFs such as GLD. (If you got in at the right time, you DID make a killing on gold) And why shouldn't they, after all, the stock indices are reaching for all-time highs on a daily basis. Who needs gold when we have the stock market? It seems that CNBC has a different financial pundit on every hour that shouts from rooftop, "THIS IS NOT A BUBBLE." But I caution everyone, if we learn nothing from the past, then we deserve to lose. And just like with gold, most of us will, unless we heed the warning signs. Cyril Kornbluth may have been right, when he coined the phrase, "the only thing we learn from history is that we never learn anything from history."

Gold Prices from October 2007 to October 2013 - Weekly Chart

With that said, I want to turn our attention to the gold chart above spanning from October 2007 to October 2013. Notice the chart pattern formed here and highlighted by the red lines is a bullish pennant pattern. A bullish pennant pattern is a pattern that pauses to consolidate into a pennant shape and then continue higher. You can see from the chart, that there are 2 points labeled where the pennant tried to break above resistance and failed before completing the pennant pattern. Then it tried to break out a 3rd time only to fail once more. Please make a mental picture of this pattern.

Gold Prices from October 2007 to October 2013 - Weekly Chart

Taking a look at this chart, you can see that around the time QE3 was announced was when it made its 3rd and final attempt to break above resistance. EVERYONE was saying buy gold. Instead, gold did a nose-dive, and broke through several resistance levels to decline over 35% and will likely decline even further yet. And what are financial headlines saying about gold now?

Notice how the headlines say that gold is falling because of tapering fears, or a strong economy in general. And yet, gold prices are far lower than when QE3 even began. Don't listen to the headlines, they are only there to sell advertising. Its very simple why gold is going down. Gold reached a point where the buyers of gold were exhausted and there were fewer people left to purchase gold, versus sell gold. Why are buyers exhausted? For nearly a decade, people have been buying gold furiously due to expected inflation, record government debts, and a number of sovereigns buying large amounts of gold. As a side note, sovereigns are always reactionary, and will be the last one to the party, so if they are doing one thing, then it is wise to do the opposite. But back to the fact that sellers over powered the buyers. We can argue about the reasons behind this phenomenon for hours and still not fully understand it. But the real reason we are here, is because what happened to gold, is the same thing that is about to happen to crude oil.

Oil Prices from October 2004 to October 2013 - Weekly Chart

Look at the oil chart above during the same time period. The first thing one should notice is that the oil chart looks very similar to the gold chart. Second, it is a much more dramatic from the standpoint of time and price movement. The Oil chart ranges in price from $147 to $35 and everywhere in between. Just like gold, there are the first 2 points labeled where it tried to break out and failed. It then continued to form the pennant pattern before trying to break out a 3rd time on the news related to Syria this past summer. Only, just like gold, it has failed and is beginning its decline. How far will it decline? Who knows, but given the length and size of the pennant formation in this chart, it will probably move slower and possibly further on a percentage basis than gold.

What have the financial pundits been saying about oil? They are saying "buy" because the fed is trying to cause inflation, the Mideast is unstable, and sovereigns have record levels of debt. The scary thing is, they are saying buy oil for the same reasons they told everyone to buy gold. Just like gold, the financial pundits are about to be proven wrong again. Even with the Fed's best efforts to cause inflation, the October CPI just decreased by .1% and you can see from the CPI chart below that despite the Fed pumping $85 billion into the system each month, inflation is trending downwards.

Supply and demand is a much more reliable metric to tell us where oil prices might be going. Look at the oil chart below and see the US production. When you couple that with the weak demand caused by an over leveraged, troubled economy, the supply and demand picture for oil is weak. It would be wise to stay away from oil investments such as this oil ETF, USO.

Source: BLS

Source: EIA

So what does the oil market outlook tell us about the greater economy? Be careful to not listen to financial pundits when oil prices begin to plummet. What they will say is to "buy the stock market" because low oil prices are good for the overall economy. Common sense would tell anyone this is true and it doesn't take an MBA to figure this out, but lets try to think a little deeper than that before we believe the financial talking heads. We should look back over the past few years and see what was happening in the economy when oil plummeted from $147 to $35 in 2008, or when oil went from $115 to $75 in a couple months in 2011.

Second, lets ask ourselves why does the Fed need to target annual inflation rates of around 2 percent? Why don't they just try to keep inflation at 0? Put another way, why is a rising price environment so important to the Fed? Quite simply, the Fed's job is to make BAD DEBT TURN INTO GOOD DEBT. The economy that we now live in, is overleveraged with everything from credit card debt, to mortgage debt to, to student debt. (not to mention government debt) And if we were to fall into a deep deflationary cycle, it would spell disaster for our economy.

Source: Visual.ly

Look at the graphic above for the facts in 2013 related to consumer debt. When a society becomes so leveraged to the point US citizens are, there is less money to spend and when there is less money to spend, things begin to deflate. When things begin to deflate, "bad debt" becomes "worse debt" because things are worth less. So although lower oil prices are good for the economy, and ultimately you and I(the consumer), it is going to be a sign of the deflationary cycle that is already in motion. If that is coupled with a rising interest rate environment, you have the makings of a perfect storm. But interest rates are a conversation for another day.

Two previous articles that I wrote talked about going long on two of what I believed to be the best oil & gas companies in the stock market. Those being Magnum Hunter Resources (MHR) and EOG Resources (EOG). These two stocks have treated investors well over the past 6 months, but with where I've just outlined prices going, these stocks should be avoided. I still love almost everything about these two oil companies. I just no longer like crude oil which is a large part of these company's portfolio.

Hopefully this was helpful to give you a different perspective on oil prices and the economy at large. The truth is in the charts and one cannot deny that despite the Fed's best efforts, we are entering a deflationary period. Remember, Soren Kierkegaard was right when he said, 'Life can only be understood backwards; but it must be lived forwards.'

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

Calafia Beach Pundit: 10 charts to watch

Posted: 10 Dec 2013 01:13 PM PST

In my view, market-based data are better indicators of what is going on beneath the economy's surface than official statistics. Market-based data are usually available in real-time, and they are derived from the interactions of millions of participants from all over the world—the wisdom of crowds distilled into one number. They aren't seasonally adjusted, and they aren't subject to revisions after the fact. But they do require some interpretation, so here is a collection of 10 market-based indicators that I'm paying attention to, and why. On balance, I think they all reveal a gradual improvement in the economic and financial fundamentals, but the persistence of a general aversion to risk.

Gold and commodity prices tend to track each other over time, but gold is much more volatile (note that the range of the y-axis on the right is about twice the range of the same y-axis on the left). Gold tends to lead other commodity prices, being the most speculative of them all. Gold also is unique among commodities since all the gold ever mined throughout history is still held by someone somewhere, whereas most other commodities are either incorporated into other stuff, consumed, or deteriorate with time.

Gold is the classic refuge from inflation, geopolitical risk, and just plain uncertainty. It's a darling of speculators, perhaps because it's price can go up or down enormously and it's widely held. What the chart above tells me is that gold overshot the prices of commodities in the early years of the current recovery—in part due to concerns that the Fed's QE program would lead to hyperinflation—and is now in the process of realigning since inflation remains low and stable. Industrial commodities have been relatively stable for several years now, and gold looks to be in the process of coming back down to a level that is more consistent with the current level of industrial commodity prices. I note that over the past century, the real price of gold in today's dollars has averaged just under $600/oz.

The two charts above zoom in on the prices of gold and industrial commodities over the past 5 years. Gold looks like it's having a tough time maintaining its current lofty levels, while industrial commodity prices have been unusually stable for the past two years.

Gold prices have tracked the inverse of the real yield on 5-yr TIPS amazingly well over the past seven years. (Think of the inverse of real yields as the price of TIPS.) The world was willing to pay ever-higher prices for gold and TIPS through 2012 because—as I see it—the world was desperate for safe assets that also offered protection against inflation. Prices for both were bid up to extremely high levels (corresponding to strongly negative real yields on TIPS) which reflected deep-seated pessimism and very bearish expectations for the future. Instead of doom and gloom, we have since seen inflation remaining low and economic growth fundamentals in the U.S. improve on the margin. Both TIPS and gold are thus facing selling pressure. Still, at current levels both reflect a fairly strong demand for risk-free assets, and thus reflect a market that is still moderately risk-averse.

The two charts above track nominal and real yields on Treasuries, and the difference between the two which is the market's expected inflation rate. If anything stands out, it is that expected inflation hasn't changed much in the past 16 years. The market currently expects inflation over the next 5 and 10 years to average a little over 2%, and that is very close to what inflation has actually averaged over the past 5 and 10 years. This tells us that the market does not see believe that the Fed's QE policy will be inflationary. Should that change, and if expected inflation were to begin rising, that would be very significant, since it would presage a significant increase in interest rates and a more rapid than expected shift by the Fed to tighter monetary policy.

Real yields on TIPS should tend to track real growth expectations for the U.S. economy. Very strong real growth inevitably leads to strong real investment returns, and TIPS need to compete with that by offering higher real yields. For the most part this has been the case, as the chart above shows. Currently, however, there is a rather large gap between the two, which to me suggests that the market worries that U.S. growth will slip below 2% in the next few years. I take this to mean that the market is pessimistic and risk-averse. But if real yields continue to rise, that would be a clear sign of a return of optimism and/or a decline of pessimism. The higher real yields on TIPS go, the more optimistic the market is about the prospects for U.S. growth.

The Baltic Dry Index measures the cost of shipping bulk commodities in the Asia/Pacific region. It is a function of two major variables: the supply of shipping capacity and the demand for shipping capacity. Prices were depressed for most of the past several years because of a significant increase in shipping capacity. More recently they have rebounded rather strongly, presumably because economic activity is continuing to increase (e.g., Chinese demand for coal from Australia) while shipping capacity is relatively constrained. As such, this appears to be signaling a somewhat stronger global economy, which would in turn support a stronger U.S. and Eurozone outlook.

The chart above shows that there has been a very strong inverse correlation between the value of the yen and the Japanese stock market. The yen was extremely strong from 2007 through 2011, and the Japanese stock market lost over half its value. That tells me that the yen was so strong (and by inference, Japanese monetary policy was so tight) that it damaged the outlook for real growth by creating deep-seated deflationary expectations and disrupting Japan's ability to compete. Consumers could make money just by holding on to their cash, for example, rather than spending it. Japanese manufacturers faced extreme difficulties competing with overseas rivals due to the incredibly strong yen, which made Japanese goods uncompetitive.

The outlook for Japan has brightened considerably in the past year, however, since the Bank of Japan adopted an aggressive policy easing stance. This has allowed the yen to return to non-deflationary levels, and that in turn has allowed Japanese manufacturers to more effectively compete in the global marketplace, and convinced consumers to save less aggressively. If the yen were to strengthen again, that would be a bad sign for the stock market and the global growth outlook.

Swap spreads have been very good leading and coincident indicators of the health of financial markets and the economy. U.S. swap spreads have been exceptionally low for the past year or so, a reflection of abundant liquidity and extremely low systemic risks. Eurozone swap spreads have been substantially higher, in contrast, reflecting ongoing problems with sovereign default risk. However, the recent decline in Eurozone swap spreads stands out: this is the lowest they've been since pre-recession days. Fundamentals in the Eurozone are likely improving significantly on the margin, and that is good news for just about everyone.

Corporate credit spreads continue to decline, and that suggests that the outlook for the U.S. economy continues to improve. Spreads are still somewhat high relative to pre-recession periods, however, suggesting that the market is still somewhat cautious. The persistence of risk aversion in U.S. markets suggests that risk assets are not yet in a bubble.

The PE ratio of the S&P 500 is only slightly higher than its long-term average, despite the fact that corporate profits are at all-time highs, both nominally and relative to GDP. This is another indicator that risk aversion persists and that equity valuations are still somewhat attractive.

As the chart above shows, Eurozone equities have significantly underperformed their U.S. counterparts in the past few years. The Eurozone economy has been in a recession for most of that period, so this is understandable. The Eurozone economies are now emerging from recession but are still plagued with sluggish growth. Nevertheless, the 12-month trailing PE ratio of the Euro Stoxx index is about the same as the PE ratio of the S&P 500 (both are just under 17), but the forward PE ratio of the Euro Stoxx index is 13, as compared to 15.4 for the S&P 500. This suggests that caution and risk aversion are somewhat more pronounced in the Eurozone, which makes sense given the problems that persist in many of the weaker Eurozone economies. On balance, I don't see that Eurozone stocks are more attractive than U.S. stocks, but there could come a time when the relative valuations of U.S. and Eurozone stocks reveal an attractive investment opportunity.

Barrick Gold: Have We Seen The Bottom? - Seeking Alpha

Posted: 10 Dec 2013 12:57 AM PST

As a contrarian investor I am looking for bargain companies with outsized return potential and a high margin of safety. What potential is and how it is measured is often basis for discussion. Many investors will see zero potential in Barrick Gold (ABX) or MGIC (MTG) or J.C. Penney (JCP) simply because they are influenced by disruptive short-term events and negative headlines. Negative events often overshadow the true intrinsic long-term value of a company as many investors believe they are superior market timers. I think that investors who purchase stocks at discounted prices when nobody else wants them and they intend to hold their investments for the long-term, they will indeed do well in the long-term. A long-term investment approach fundamentally changes the mindset out of which an investor approaches investments and short-term distractions, noise and negativity just fall aside.

Barrick Gold is such a contrarian investment. The company has fallen on hard times as the gold price declined substantially over the last two years and shares of Barrick Gold as well as other gold- and copper miners fell off a cliff:

(click to enlarge)

The share price of Barrick Gold has fallen more than the underlying gold price as investors feared a continued decrease in gold prices. As such, gold bears display a textbook example of representativeness bias in which investors simply extrapolate current events in the marketplace that is, persistently low and/or falling gold prices). As negativity increases so does the differential between share price and intrinsic value. It is clearly not easy to stay focused and positive when confronted with a wave of bad news. The chart below depicts the gold spot price over the most recent two years and shows why gold investments turned out bad.

(click to enlarge)

In light of crumbling gold prices, Barrick Gold does the right things for shareholders. The company just recently announced a $3 billion equity offering in order to gain financial flexibility and decrease financial leverage. In addition, Barrick Gold is focused on bringing capital expenditures down via a suspension of its Pascua-Lama mine operations in Argentina/Chile (this should relieve cash flow by about $1 billion in 2014). Further, the company streamlines its portfolio and booked $700 million in non-core asset sales YTD in 2013. Barrick also has a comprehensive cost reduction program in place that aims at cutting off $500 million of the cost structure. Going forward, I could see a sale of copper operations or a mine-/cost-sharing project with a strategic partneras further catalysts.

Long-term fundamentals still intact

Gold is a precious commodity that not only finds applications in the jewelry and electronics sectors of civilization. Investment demand for gold bars and coins also contributes to the desirability of this commodity and its reputation as a safe heaven investment was proven during the financial crisis as the gold price spiked amid extreme levels of economic uncertainty. Jewelry, of course, is the most relevant sector in the consumption sphere and demand from China and India could be instrumental in driving gold prices over the next decade or two. Growing and richer Asian economies will exhibit higher jewelry demand as Asian societies view gold jewelry as a sign of social- and economic mobility and success. Jewelry- and industrial demand are going to increase in the long-term as Asia lifts hundreds of millions of people out of poverty. Gold also has high conductivity and therefore finds irreplaceable applications in electrical wiring and contacts.

Investment demand will exist as long as people invest in stocks and bonds and need a safe heaven when other non-commodity asset classes undergo stress. Furthermore, gold investments provide investors with substantial diversification benefits especially when hold in equity- and bond dominated portfolios.

Market valuation

The reasons why I am particularly attracted to Barrick Gold are threefold. First, I believe the company takes the right steps for shareholders in reducing costs, realigning capex with profitability, selling non-core assets and improving the balance sheet. Secondly, Barrick Gold is a large-scale gold explorer with significant tech know-how and experience which helps in providing the company with a cost advantage. Barrick's estimated 2013 all-in sustaining costs are projected to hit $900-975/oz which compares to $1,150-1,225/oz for other senior gold producers. Thirdly, Barrick Gold shares have been driven down to such low levels that the company is just dirt cheap.

Barrick Gold trades at less than eight times forward earnings while the peer group average stands at 14.52. Goldcorp (GG) and Kinross Gold (KGC) trade at the highest P/E multiples of 19.88 and 18.32 respectively. The median of the peer group comes out at 15.53 which still is about twice as much as the P/E ratio exhibited by Barrick Gold.

(click to enlarge)

Conclusion

Long-term gold price drivers are fundamentally intact. Investment-, jewelry- and industrial demand are secular trends that will affect the gold price in the long-term. At the same time, new gold discoveries are rare which adds to the favorable long-term supply/demand picture of the gold commodity. In addition, gold provides investors with significant diversification benefits which can help reduce overall portfolio volatility.

Most importantly, Barrick Gold trades at a ridiculous valuation. A multiple of eight times forward earnings translates into an earnings yield of 12.6% which is inappropriate for an industry-leading, large-cap heavyweight in the gold sector. Other companies in the gold sector command significantly higher multiples; most noteworthy is Goldcorp with a multiple of almost twenty. Barrick Gold also moves aggressively to counter weak gold prices through non-core asset sales and cost reductions. Strong anti-cyclical BUY on valuation, favorable long-term gold price drivers, cost cutting initiatives and portfolio diversification benefits.

Disclosure: I am long ABX, GG, MTG, JCP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

Gold Correction Isn't Over, But Gold Price Heading to $20,000 :: The ...

Posted: 10 Dec 2013 12:39 PM PST

Gold Correction Isn't Over, But Gold Price Heading to $20,000 Commodities / Gold and Silver 2014 Dec 10, 2013 - 09:39 PM GMT

By: Casey_Research

By Louis James, Chief Metals & Mining Investment Strategist

In April of 2008, Casey International Speculator published an article called "Gold—Relative Performance to Oil" by Professor Krassimir Petrov, then at the American University in Bulgaria, now a visiting professor at Prince of Songkla University in Thailand. He told us he thought the Mania Phase of the gold market was many years off, which was not a popular thing to say at the time:

"In about 8-10 years from now, we should expect the commodity bull market to reach a mania of historic proportions.

"It is important to emphasize that the above projection is entirely mine. I base it on my own studies of historical episodes of manias, bubbles, and more generally of cyclical analysis. In fact, it contradicts many world-renowned scholars in the field. For example, the highly regarded Frank Veneroso and Robert Prechter widely publicized their beliefs that during 2007 there was a commodity bubble; both of them called the collapse in commodity prices in mid-March of 2008 to be the bursting of the bubble. I strongly disagree with them.

"I also disagree with many highly sophisticated gold investors and with our own Doug Casey that the Mania stage, if there is one, will be in 2-3 years, and possibly even sooner... Although I disagree that we will see a mania in a couple years, I expect healthy returns for gold."

It turned out that Dr. Petrov was right. Five and a half years later, here's his current take on gold and the metal's ongoing correction…

Louis James: So Krassimir, it's been a long and interesting five years since we last spoke… Gold bugs didn't like your answer then, but so far it seems that you were right. So what's your take on gold today?

Krassimir Petrov: Well, most gold bugs won't like my answer again, because I think we are still between six to ten years away from the peak of the gold bull. We are exactly in the middle of this secular bull market, and a secular bull market is usually punctuated or separated by a major cyclical bear market. I think that the ongoing 24-month correction is that typical big major cyclical correction—a cyclical bear market within the context of the secular bull market.

Thinking in terms of behavioral analysis, most investors are very, very bearish on gold. People who are not gold bugs overall still dismiss gold as a good or even as a legitimate investment. That, too, is typical of a mid-cycle. So as far as I'm concerned, we are somewhere in the middle of the cycle, which may easily go for another 10 years.

I expect that this secular bull market for gold will last a total of 20 to 25 years, dating back to its beginning in 2000. Some people like to date the beginning of this secular bull market at the cyclical bottom in 1999, while others date it at the cyclical bottom in 2001. I prefer to date it at 2000, so that the secular bottom for gold coincides with the secular top of the stock market in 2000.

L: That's interesting. But I'm not sure gold bugs would find this to be bad news. The thing they're afraid to hear is that the market has peaked already—that the $1,900 nominal price peak in 2011 was the top, and that it's downhill for the next two decades. To hear you say that there is a basis in more than one type of analysis for arguing that we're still in the middle of the bull cycle—and that it should go upwards over the next 10 years—that's actually quite welcome.

Petrov: Yes, it's great news. But we're still not going to get to the Mania Phase for at least another two, but more likely four to six years from now.

Now, we should clarify what we mean by the Mania Phase. Last time, it was the 1979 to early 1980 period. It's the last phase of the cycle when the price goes parabolic. Past cycles show that the Mania Phase is typically 10% or 15% of the total cycle. So it's important to pick the proper dates for defining a gold bull market. I prefer to date the previous one from 1966 as the beginning of the market, to January of 1980 as the top of the cycle. That means that the previous bull market lasted 14 years, and it's fair to say that the Mania Phase lasted about 18 months, or just under 15% of the cycle.

So I expect the Mania Phase for the current bull cycle to last about two to three years, and it's many years yet until we reach it.

In terms of market psychology, we still have many people who believe in real estate; we still have many people buying and believing in the safety of bonds; we still have many people who believe in stocks. All of these people still outright dismiss gold as a legitimate investment. So, to get to the Mania Phase, we need all of these people to convert to gold bull market thinking, and that's going to be six to eight years from now. No sooner.

L: Hm. Your analysis is a combination of what we might call the fundamentals and the technicals. Looking at the market today—

Petrov: Let's clarify. When I say fundamental analysis, I mean strictly relevant valuation ratios. For example, according to the valuation of gold relative to the stock market, i.e., the Dow/gold ratio, gold is extremely undervalued, easily by about 10 times, relative to the stock market.

Fundamental analysis can also mean the relative price of gold to real estate—the number of ounces necessary to buy a house. Looked at this way, gold is still roughly about 10 times undervalued.

Thus, fundamental analysis refers to the valuation of gold relative to the other asset classes (stocks, bonds, real estate, and currencies), and each of these analyses suggests that gold is undervalued about 10 times.

In terms of portfolio analysis, gold today is probably about one percent of an average investor's portfolio.

L: Right; it's underrepresented. But before we go there, while we are defining things, can you define how you look at these time periods? Most people would say that the last great bull market of the 1970s began in 1971, when Richard Nixon closed the gold window, not back in 1966, when the price of gold was fixed. Can you explain that to us, please?

Petrov: Well, first of all, we had the London Gold Pool, established in 1961 to maintain the price of gold stable at $35. But just because the price was fixed legally and maintained by the pool at $35 doesn't mean that there was no underlying bull market. The mere fact that the London Gold Pool was manipulating gold in the late 1960s, before the pool collapsed in 1968, should tell us for sure that we already had an incipient, ongoing secular bull market.

The other argument is that while the London Gold Pool price was fixed at $35, there were freely traded markets in gold outside the participating countries, and the market price at that moment was steadily rising. So, around 1968 we had a two-tiered gold market: the fixed government price at $35 and the free-market price—and these two prices were diverging, with the free price moving steadily higher and higher.

L: Do you have data on that? I never thought about it, but surely the gold souks and other markets must have been going nuts before Nixon took the dollar completely off the gold standard.

Petrov: Yes. There have been and still are many gold markets in the Arab world, and there have been many gold markets in Europe, including Switzerland. Free-market prices were ranging significantly higher than the fixed price: up to 10, 20, or 30% premiums.

There's also a completely different way to think about it: in order to time gold secular bull and bear markets properly, it would make the most sense that they would be the inverse of stock market secular bull and bear markets. Thus, a secular bottom for gold should coincide with the secular top for stocks. And based on the work of many stock market analysts, it is generally accepted that the secular bear market in stocks began in 1966 and ended in 1980 to 1982. This again suggests to me that it would make a lot of sense to use 1966 for dating the beginning of the gold bull market.

L: Understood. On this subject of dating markets, what is it that makes you think this one's going to be a 25-year cycle? That's substantially longer than the last one. We have a different world today, sure, but can you explain why you think this cycle will be that long?

Petrov: Well, based on all the types of analyses I use—cyclical analysis, behavioral analysis, portfolio analysis, fundamental analysis, and technical analysis—this bull market is developing a lot slower, so it will take a lot longer.

The correction from 1973 to 1975 was the major cyclical correction of the last gold bull cycle, from roughly $200 down to roughly $100. Back then, it took from 1966 to 1973—about six to seven years—for the correction to begin. This time, it took roughly 11 years to begin, so I think the length of this cycle could be anywhere between 50 and 60% longer than the last one.

Let's clarify this, because it's very important for gold bulls who are suffering through the pain of correction now. If we are facing a 50-60% extended time frame of this cycle and the major correction in the previous bull market was roughly two years, we could easily have the ongoing correction last 30 to 35 months. Given the starting point in 2011, the correction could last another six, eight, or ten more months before we hit rock bottom.

L: Another six to ten months before this correction hits bottom is definitely not what gold investors want to hear.

Petrov: I'm not saying that I expect it, but another six to ten months should not surprise us at all. A lot of people jumped on the gold bull market in 2008, 2009, 2010, 2011, and these people haven't given up yet. Behaviorally, we expect that these latecomers—maybe 80-90% of them—should and would give up on gold and sell before the new cyclical bull resumes.

L: Whoa—now that would be a bloodbath. Can we go back to your version of fundamental analysis for a moment and compare gold to other metrics? You mentioned that gold is still relatively undervalued in terms of houses and stocks and some things, but I've heard from other analysts that it's relatively high compared to other things—loaves of bread, oil, and more.

Petrov: Let's take oil, for example. We have a very stable long-term ratio between oil and silver, and that ratio is roughly one to one. For a long time, silver was about $1.20, and oil was roughly $1.20. At the peak in 1980, silver was about $45, and oil was about $45. Right now, silver is four to five times undervalued compared to oil, so in terms of oil, I would disagree for silver. The long-term ratio of gold to oil is about 15 to 20, depending on the time frame, so gold may not be cheap, but it's not overvalued relative to oil either.

But suppose gold were overvalued relative to other commodities—which I doubt, but even if we suppose that it's correct, it simply doesn't mean that gold is generally overvalued. The other commodities could be even more—meaning 10, 15, 20 times—undervalued relative to the stock market, or real estate, or bonds. There is no contradiction. In fundamental analysis, it is illegitimate to compare gold, which is largely viewed as a commodity, to other commodities. We should compare it as one asset class against other asset classes.

For example, we could compare gold relative to real estate. By this measure, it is easily five to ten times undervalued. Separately, we could evaluate it relative to stocks. When you compare gold to stocks in terms of the Dow/gold ratio, it's easily five to ten times undervalued. Separately again, we could evaluate it relative to bonds, but the valuation is much more complicated, because we need to impute a proper inflation-adjusted long-term yield, so it's better not to get into this now. And finally, we could evaluate it separately against currencies. More on that later.

Now, I believe that when this cycle is over, we are going to reach a Dow/gold ratio far lower than in previous cycles, which have ended with a Dow/gold ratio of about 2:1 (two ounces of gold for one unit of Dow). This time, we are going to end up with a ratio of 1:2—one ounce of gold is going to buy two units of Dow. So, if the ratio right now is about 8:1, I think gold could go up 16 times relative to the stock market today.

L: That's quite a statement. Government intervention today is so extreme and stocks in general seem so overvalued, I can believe the Dow/gold ratio could reach a new extreme—but I have to follow up on such an aggressive statement. What do you base that on? Why do you think it will go to 1:2 instead of 2:1?

Petrov: If I remember correctly, we had a 2:1 ratio during the first bottom in 1932; the Dow Jones bottomed out at $42 and gold was roughly about $20 before Roosevelt devalued the dollar. That was also the beginning of the so-called "paper world," when we embarked on the current paper cycle.

The next cycle bottomed in 1980; gold was roughly 850 and the stock market was roughly 850, yielding a ratio of 1:1. Now, if we look at it in terms of the "paper" supercycle, beginning in the early 20th century and extending to the early 21st century, you can draw a technical line of support levels for the Dow/gold ratio. If you do this, you end up with Dow/gold bottoming at 2:1 (in 1932), then at 1:1 (in 1980), and you can project the next one to bottom at 1:2.

Another way to think about it is that we are currently in a so-called supercycle—whether it's a gold supercycle or a commodity supercycle—and this supercycle should last 50 to 70% longer than the previous one. It will overcorrect for the whole period of paper money over the last 80 years.

From a behavioral perspective, I could easily see people overreacting; we could easily see that at the peak we're going to have a major panic with overshooting. I expect the overshooting to be roughly proportional to the length of the whole corrective process.

In other words, if this cycle is extended in time frame, we would expect the overshooting of the Mania Phase to be significantly larger. It should be no surprise, then, if we get a ratio of 1:1.5 or 1:2, with gold valued more than the Dow.

L: That's a scary world you're describing, but the argument makes sense. How many cycles do you have to base your cyclical analysis on, to be able to say that the average Mania Phase is 15% of the cycle?

Petrov: Well, gold is the most complicated investment asset. It is half commodity, and it behaves as a commodity, but it's also half currency. It's the only asset that belongs in two asset classes, properly considered to be a financial asset (money) and at the same time a real asset (commodity). So, even though gold prices were fixed in the 20th century, you can get proper cycles for commodities over the time period and include gold in them. If you look into commodity cycles historically, there are four to five longer (AKA Kondratieff) commodity cycles you can use to infer what the behavior for gold as a commodity might be.

L: So would it be fair, then, to characterize your projections as saying, "As long as gold is treated by investors as a commodity, then these are the time frames and the projections we can make"?

Petrov: Right.

L: But if at some point the world really goes off the deep end and the money aspect of gold comes to the forefront—if people completely lose confidence in the US dollar, for example—at that point, the fact that gold is a commodity would not be the main driver. The monetary aspect of gold would take over?

Petrov: No, not exactly, because you will still have a commodity cycle. You will still have oil moving up. Rice will still be moving up, as will wheat, all the other commodities pushing higher and higher, and they will pull gold.

Yet another important tangent here is that in commodity bull markets, gold is usually lagging in the early stages. In the late stages of a commodity bull market, as gold becomes perceived to be an inflation hedge, it begins to accelerate relative to other commodities. This is yet another very good indicator that tells me that we are still in the middle of a secular bull market in gold. In other words, because gold is not yet rapidly outstripping other commodities like wheat, or copper, or crude oil, we're not yet in the late stages of the gold bull market.

L: That's very interesting. But if I remember the gold chart over the last great bull market correctly, just before the 1973-1976 correction, there was quite an acceleration, such as you're describing—and we had one like it in 2011. Gold shot up $300 in the weeks before the $1,900 peak.

Petrov: Absolutely correct. This acceleration before the correction is exactly what tells me that the correction we're in now is a major cyclical correction, just like in the mid-1970s. The faster the preceding acceleration, the longer the ensuing correction. This relationship is what tells me that this correction will be very long and painful. Yet another indicator. Everything fits in perfectly. All of these indicators confirm each other.

L: Could you imagine something from the political world changing or accelerating this cycle? If the politicians in Washington are stupid enough to profoundly shake the faith in the US dollar that foreigners have, could that not change the cycle?

Petrov: Yes, that's a possibility. This is exactly what a gray swan is; a gray swan is an event that is not very likely, that is difficult to predict, but is nonetheless possible to predict and expect. One example of a gray swan would be a nuclear war. It's possible. Another could be a major currency war, à la Jim Rickards. There are a number of gray swans that could come at any time, any place, accelerating the cycle. It's perfectly possible, but not likely.

Now, going back to your question about monetizing or remonetizing gold—the monetary aspect of gold taking over that you mentioned. The remonetization of gold wouldn't short-circuit the commodity cycle; the commodity cycle would continue. Actually, you'd expect the remonetization of gold to go hand in hand with a commodity bull market.

You also need to understand that the remonetization of gold would not be a single event, not a point in time. Remonetization of gold is a process that could easily last five to ten years. No one is going to declare gold to be the monetary currency of the world tomorrow.

What will happen is that countries like China will accumulate gold over time. Over time, gold will be revalued significantly higher, and there will be global arrangements. The yuan will become a global currency, used in international transactions. Many institutional arrangements need to be in place around the world, including storage, payments, settlements, and some rebalancing between central banks, as some central banks have way too little monetary gold at the moment.

L: I agree, and see some of those things happening already. But I don't expect any government to lead the way to a new gold standard. I simply expect more and more people to start using gold as money, until what governments are left bow to the reality. I believe the market will choose whatever works best for money.

Petrov: Indeed, and that's a process that will take many years. Getting back to gold in a portfolio context, relative to currencies, gold is extremely cheap. Historically, gold will constitute about 10-15% of the global investment portfolio relative to the sum of real estate, stocks, bonds, and currencies. Estimates suggest that right now gold is valued at roughly about one percent of the global investment portfolio.

L: That implies… an enormous price for gold if it reverts to the mean. Mine production is such a tiny amount of supply; the only way for what you say to come true is for gold to go to something on the order of $20,000 an ounce.

Petrov: Correct. $15,000 to $20,000. That's exactly what I'm saying.

In a portfolio context, gold is undervalued easily 10 to 15 times. On a fundamental basis, gold is undervalued relative to stocks 10 to 15 times, and relative to real estate about 10 times. When we use the different types of analyses, each one of them separately and independently tells us that we still have a lot longer to go: about six to 10 more years; maybe even 12 years. And we still have a lot higher to rise; maybe 10-15 times.

Not relative to oil, nor wheat, but gold can easily rise 10 to 15 times in fiat-dollar terms. It can rise 10 times in, let's say, stock market terms. And yes, it can go 10 to 15 times relative to long-term bonds. (We have to differentiate short-term bonds and long-term bonds, as bond yields rise to 10 or 15 percent.)

So, portfolio analysis and fundamental analysis tell me that we still have a long way to go, and cyclical analysis tells me we are roughly mid-cycle. It tells me that from the beginning of the cycle (2000) to the correction (2011) we were up almost eight times, from the bottom of the current correction (2013-2014) to the peak in another six to ten years, we are still going to rise another 10 times.

Whether it's eight years or 12, it's impossible to predict; whether it's eight times or 12, again, impossible to predict; but the order of magnitude will be around 10 times current levels.

L: You've touched on technical analysis: do you rely on it much?

Petrov: Well, yes, but in this particular case, technical subsumes or incorporates a great deal of cyclical analysis. It's very difficult to use technical analysis for secular cycles. We usually use technical analysis for daily (short-term) cycles, or weekly (intermediate) cycles, or monthly (long-term) cycles. We use them as described in the classic book Technical Analysis of Stock Market Trends by Edwards, Magee, and Bassetti.

If we apply technical analysis to our current correction, it doesn't appear to be quite over yet. It could still run another three to six months, possibly nine months. But when we talk about the secular cycle, we need to switch from technical to long-term cyclical analysis.

L: Okay. Let's change topic to the flip side of this. Can you summarize your view of the global economy now? Do you believe that the efforts of the governments of the world to reflate the economy are succeeding? Or how does the big picture look to you?

Petrov: The big picture is an austere picture. Reflation will always succeed until it eventually fails. The way I see it, the US is going down, down, and down from here—the US is a very easy forecast. The UK is also going down, down, and down from here—another easy forecast. The European Union is going to be going mostly down. However, most of Asia is in bubble mode. Australia is in a major bubble that's in the process of bursting or is about to do so; it's going to go through a major depression. China is a huge bubble, so China will get its own Great Depression, which could last five to ten years. This five- to ten-year China bust would fit within my overall 10-year forecast for the remainder of the secular bull market in gold.

I see a lot of very inflated and overheating Asian economies. I was in Hong Kong in January, and the Hong Kong economy is booming to the point of overheating. It's crazy. I was in Singapore just three months ago, and the Singapore economy is clearly overheating. Last year I was teaching in Macao for a few months, and the economy is overheating there as well—real estate is crazy; rents are obscene; five-star hotels are full and casinos crowded.

Right now I'm teaching in Thailand. It's easy here to see that people are still crazy about real estate—everyone's talking about real estate; we still have a peaking real estate bubble here. Consumption is going crazy in the whole society, and most things are bought on installment credit.

Another easy forecast is Japan; it too will be going down, down, and down from here. Japan has nowhere to go but down. It's been reflating and reflating, and it hasn't done them any good. Add all this up and what I actually see is a repeat of the 1997 Asian Crisis, involving most Asian countries.

L: So your overall view is that reflation works until it doesn't, and you believe that on the global scale we're at the point where it won't work anymore?

Petrov: Not exactly. We're at the point where reflation doesn't work anymore for the US, no matter how hard it tries. It doesn't work for the UK; not for most of Europe; not for Japan—no matter how hard they try. But reflation is still working in China. Reflation is still working for most of Asia and Australia. As I see it, Asia is overheating significantly, based on that global reflation.

Even the Philippines was overheating when I was there two years ago. Malaysia is overheating big time—consumerism at its finest—and I'm hearing stories about Indonesia overheating until recently as well. Maybe we have the first sounds of that bubble bursting in countries like India, Malaysia, and Indonesia. The Indian currency is weakening significantly; so is the Malaysian currency. If I remember correctly, the Indonesian currency is weakening significantly, and I know well that their money market rates are skyrocketing in the last few months.

So we may have now the beginning of the next Asian Financial Crisis. Asia is still going to be able to reflate a little longer, another year or two, maybe three. It's very hard to say how long a bubble will last as it is inflating. The same thing for Australia; it will continue to reflate for a few more years. So for Asia and Australia, we are not yet at the point when reflation will no longer work. Very difficult to say when that will change, but we're there for the US, UK, Europe, and Japan.

L: Why won't reflation work for the US and its pals?

Petrov: Reflation doesn't work because of the enormous accumulated economic distortions of the real sector and the labor market. All the dislocations, all the malinvestments have accumulated to the point where reflation has diminishing returns.

Like everything else, inflation and reflation have diminishing returns. The US now needs maybe three, four, or five trillion annually to reflate, in order to work. With each round, the need rises exponentially. The US is on the steep end of this exponential curve, so the amount needed to reflate the economy is probably way more than the tolerance of anyone around the world—confidence in the US dollar won't take it. The US is at the point where it is just not going to work.

L: I understand; if they're running trillion-dollar deficits now and the economy is still sluggish, what would they have to do to get it hopping again, and is that even possible?

Petrov: Correct. The Fed has tripled its balance sheet in a matter of three to four years—and it still doesn't work. So what can they do? Increase it 10 times? Or 20 times? Maybe if they increased it 10 or 20 times, they could breathe another one or two or three years of extra life into the economy. But increasing the Fed's balance sheet 10 or 20 times would be an extraordinarily risky enterprise. I don't think that they will dare accelerate that much that fast!

L: If they did, it would trash the dollar and boost gold and other commodities.

Petrov: Yes, that's clear—the bond and the currency markets would surely revolt. That's a straight shot there. The detailed ramifications for commodities, if they decide to go exponential from here, are a huge subject for another day. For now, we can say that they have been going exponential over the last three to four years, and it hasn't worked.

Also, we know well from the hyperinflation of the Weimar Republic that they went exponential early on, and it stopped working in 1921. For two more years, they went insanely exponential, and it still didn't work. I think the US is at or near the equivalent of 1921 for Weimar.

L: An alarming thought. So what happens when Europeans can no longer afford to pay the Russians for gas to heat their homes? Large chunks of Europe might soon need to learn Russian.

Petrov: Not necessarily, but Europe is going to become Russia's best friend and geopolitical ally. The six countries in the Shanghai Co-op are already close allies of Russia. So is Iran. So Russia has seven or eight very strong, close allies. European countries will, one by one, be joining Russia. Think about it from the point of view of Germany: why should Germans be geopolitical allies of the US or the UK? Historically, it doesn't make any sense. It makes a lot more sense for them to join the Russians and the Chinese and to let the Americans and British collapse. So that's what I expect, and Russia will use all its energy to dictate geopolitics to them.

L: Food for thought. Anything else on your mind that you think investors should be thinking about?

Petrov: Well, it's fairly straightforward. First, I do expect that the stock market is going to lose significant value over the next five to ten years. Second, I believe that real estate is still grossly overvalued; as interest rates eventually rise, real estate will fall hard—overall, it will not hold value well. Third, I also believe that bonds are extremely overvalued and that yields are extremely low. I expect interest rates to begin to rise and bond prices to fall, so I strongly discourage investors from staying in bonds. Finally, I expect that governments will continue to inflate, even though it doesn't work, and that currencies will devalue.

I strongly encourage investors to stay out of all four of these asset classes. Investors should be staying well diversified in commodities. They shouldn't ignore food—agriculture. They shouldn't ignore energy. But their portfolios should be dominated by precious metals.

L: That's what Doug Casey says, and that the reason to own gold is for prudence. To speculate for profit, we want the leverage only the mining stocks can give us.

Thank you very much, Krassimir; it's been a very interesting conversation. We shouldn't let this go another seven years before we talk again.

Petrov: [Laughs] Okay. Hopefully a lot sooner.

Hopefully you'll be prepared when the gold bull market reaches the Mania Phase… and hopefully you are taking advantage of the low gold price to stack up on your "hard money" safety net. Find out the best ways to invest in gold, when to buy, and what to watch for—in Casey's 2014 Gold Investor's Guide. Click here to get your free special report now.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.