Gold And Silver Prices And The Mining Shares During 2016

I wasn’t going to write anything until next week, but reporting on the annual performance for gold and silver in the first week of the year is appropriate and timely.

Publishing the following table has been an annual event in my work for the past few years.  Using the last published value of the year for gold and silver (not their bull / bear market, high / low prices) I calculate the annual performance as well as how far metal prices has gone in their bull or bear markets on an end of year basis.  Metal prices for the 1980 to 2000 bear market bottomed in 2000, with 2001 (Green Row) being year one of the current bull market.  And yes the PM mining shares and the old monetary metals are still in a bull market.

Looking at the price of gold from 2000 to 2012; gold saw twelve yearly gains.  This is remarkable for two reasons; I know of no other market series that saw twelve consecutive annual gains.  The Dow Jones has never seen twelve consecutive years of advances, yet somehow during this entire twelve year period, the financial media was successful in maintaining a wide spread public revulsion toward the gold and silver markets.  Darn right they did, and they continue doing so today!  Silver during this period (2000-2012) saw only two down years, and frequently saw double digit gains that far outperformed those holders of gold enjoyed.

At the close of 2016, gold saw its first annual advance since 2012.  An 8.51% advance may not seem like much, but neither was the 2.46% gain seen in 2001.  Keep in mind that although the gold bulls at the end of 2016 are disheartened, the price of gold has still advanced 323% from its close of December 2000. 

That’s something the Dow Jones, S&P 500, NASDAQ Composite indices and most of the groups in the Dow Jones Total Market Group can’t say.  And that’s with the metals near the bottom of a three year correction as most major stock indexes now find themselves at, or just a whisker from their all-time highs.

Silver was up 14.98% from a year ago, not that it feels like it!  Historically, silver outperforms gold, something that the table above (first table) shows is something silver has failed to do since 2000.  I expect silver will once again outperform gold, maybe starting this year.

A note on the bull market data for 1977 to 1979; the percentage gains are based on the closing prices of 02 January 1969:

• Gold:  $43.50
• Silver:   $1.85

Can you imagine buying an ounce of gold for $43.50, silver at $1.85?  Or that when gold broke above $100 in May 1973 the world held its breadth!  Probably not.  But then in 1969, who could have imagined gold trading at $1,151, or that seeing the price of gold over $1,000 would inspire pessimism in the gold market.  These are emotional reactions to the changes in the price of gold, and responding to emotions is no way to make money in the market. 

I admit it’s been hard being optimistic on precious metals assets for the past few years, but I just keep my eye on the blue plot in the chart below.  In reckless disregard to the inflationary consequences, Washington continues to issue ever more paper dollars.  Since the high-tech bubble began deflating in January 2000, the volume of paper dollars in circulation (CinC) has increased 168.8%.   

Since the Chinese invented paper money in the 10^th century; printing ever more money has never lead any society to the Promised Land, as noted by William Durant below:

"Such were the sources of that flood of paper money which, ever since, has alternatively accelerated and threatened the economic life of the world."
-William Durant: Our Oriental Heritage, (1935) pg 780

And the “policy makers” now want to eliminate paper money all together. 

Hasbro, maker of the Monopoly real estate game now has a version of their famous parlor game that uses electronic money instead of paper-monopoly money.  Whose idea was that?

http://www.hasbro.com/en-us/media/monopoly-electronic-banking-game:D4391011-5056-900B-1016-FDED3497EE10

Note how the Dow Jones (Red Plot chart below), has failed to keep up with the expansion of CinC since January 2000.  After adjusting for inflation (not inflation as measured by the Labor Department’s CPI), I doubt most investors have bettered their financial situation risking their money in the stock market since January 2000. 

The fact is that gold and silver bullion have far outperformed the broad stock market and the expansion in CinC for the past sixteen years (table below), and the PM mining stocks, after correcting by 30% since last summer aren’t all that far behind the Dow Jones which is now at an all-time high. 

Returning to my first table above, just a few weeks after the close of 1979, gold had risen to$825 on 21 January 1980 and silver at $48.70 on 17 January 1980 as the precious metals market experienced a historic bout of panic buying.  After January 1980, the old monetary metals began a twenty year bear market, something that isn’t going to happen after the close of 2016.  Why do I believe that?  Because we haven’t seen a panic out of financial assets into precious metal assets yet; after all that was what caused people to buy gold and silver at any price in early January 1980; the bond market was crashing as consumer price inflation soared to double digits.  So far in the 21^st century, we’ve yet to see this; yet it’s coming.

In the chart below we see that bond yields were rising since the end of World War Two in response to rising consumer prices.  Forgotten today, the post war period was plagued by rising consumer prices as we see in this quote from 1957:

“The real problem with retiring is money.  Most people save their whole lives to retire in the same style they enjoyed when they were working, only to realize that they can’t live like they used to even while they’re still working.  You see these ads for retirement and they always have fishing boats in the background.  That’s because for $120 a month, fishing is the only way retired people can feed themselves.

- George Burns: Burns and Allen Television Show / Season 8 Episode 9, 1957

I went shopping for groceries this week and spent $120 on three bags of food!  Don’t tell me about low inflation in today’s economy.  The government’s CPI data series is the longest running fake-news story around.

By 1958 consumer prices and bond yields increased to the point where the Barron’s Gold Mining Index (BGMI) began a bull market, though gold itself was fixed by fiat at $35 until 1968.  It’s very evident, and logical that the 1958 to 1980 bull markets in the PM mining shares and the monetary metals took place in a rising interest rate environment.

Look at what the tech wreck and sub-prime mortgage bear markets did to Barron’s Intermediate Grade Bond Yields.  Since March 2009, with the implementation of three quantitative easing, and zero interest rate programs by the Fed in the past eight years, corporate America has taken on massive amounts of debt for no good reason.  In the next financial crisis I wouldn’t be shocked if both Best and Intermediate Grade Bond Yields take off.

That’s something that our current bull market in the mining shares and precious metals haven’t seen since the 2001-2016 bull market began; where bizarrely rising precious metals assets occurred as bond yields continued in their multi-decade decline.  This is an anomaly resulting from our financial markets being “regulated” by the Federal government.

This won’t go on forever.  The bull market in the precious metals mining shares and the metals they mine will see their most significant gains when bond yields once again trend upwards to double digits and above, exactly as they did from 1958 to 1980.

Next is a table giving the one year performance for the Dow Jones Total Market Groups (DJTMG) and other key market indices.  The precious metals miners are #3, 4 & 5 in the list, even after seeing their highs of last summer corrected by 30%.  Silver and gold bullion are at #39 and #63. 

CPI is #85, at 1.73%; that has to be a lie.  But if the government says it’s so, the MSM is more than willing to pass the fake statistics on to a trusting public without challenge.

Home Construction #93 and REITS #95 find themselves down for the year.  Bond yields have been rising since last July, and that isn’t good for real estate.

The banks since the summer of 2016 have done very well in the BEV chart below.  But we’re still in the aftermath of the sub-prime mortgage debacle.  Since 2007, nothing has been done to clean up the tens of trillions of illiquid assets and derivative liabilities on these banks’ balance sheets.  Their accounting is at best specious, so they’re still damaged goods as far as I’m concerned.  If people in 2017 are now paying top dollar for shares that in March 2009 were down some 86% from their highs of 2007 doesn’t change that.  An 86% crash?  That’s a Great Depression event!  These banks in 2017 are ticking time bombs.  Still they may go on to new highs.  However they will do so without me owning any.

One thing this BEV plot of the banking stocks illustrates very well is how breaking the Bretton Wood’s $35 gold peg in 1971 created instability in the banking system.  Sure, after the dollar was freed from the last vestige of the gold standard the insiders in these banks were making money like they never had before.  With their spare change Wall Street has purchased members of congress and market regulators.  But time will prove that their gain was at everyone else’s expense.

One last graphic, showing how our current bull market in gold has performed compared to the Dow Jones from 1982 to 2000.  Again using the last published price for the year, this time for the Dow Jones and gold.  Year zero equals:

• 1981 for the Dow Jones
• 2000 for gold

Looking at history, the Dow Jones saw three down years during its first twelve years of the 1982-2000 bull market, while as mentioned before, gold’s first twelve years of its current bull market only saw annual advances.

Another notable fact made evident in this table is that gold during the first twelve years of its bull market outperformed the Dow Jones during the first twelve years of its 1982-2000 bull market by just under 200%.  One might believe that the main-stream financial media would have covered the gold market from 2000 to 2012 with as much enthusiasm as it had the Dow Jones from 1981 to 1993, but that wasn’t so.  In fact it was quite the opposite.

In January 2017, anticipating gold, silver and their miners to make significant advances in the years to come as market values in the stock and bond markets deflate seems a very reasonable assumption.

Mark J. Lundeen

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