…And a new, real bull market.

A Guest Report
By Jordan Roy-Byrne CMT, MFTA

March 30, 2022

Dear Fellow Investor,

Gold On The Verge Of Major Breakout
— And A New, Real Bull Market

Coming into the year, I had doubts gold would perform this quickly. The $1,900 level was major resistance, and gold has a strong history of making major lows at the start of new Federal Reserve rate hike cycles. The setup was obvious for weakness in the first quarter.

However, things don't always work out as we expect. Instead, gold rocketed past major resistance at $1,900 and reached a position for a historic breakout and a new and real bull market.

For gold to be in a “real” bull market, it has to outperform the stock market. As you can see in the chart below, gold's bull markets in the 1970s and 2000s were accompanied by strong outperformance against the stock market. In the first bull market, the gold to S&P 500 ratio gained over 20-fold. In the most recent bull market, the ratio gained over nine-fold.

Although gold and gold shares have performed well since 2016, and 2016 was a major bottom for our sector, it has not experienced a real bull market. The recent period reminds me of the early to mid-1960s. While the gold price was fixed, gold shares trended higher along with the stock market as inflation began to inch higher. During the past five years, the stock market continued to make higher highs and has even outperformed gold.

The other aspect of the above chart (and the next one) is the CAPE ratio, a 10-year price-earnings ratio of the stock market. It is important because it portends to long-term return potential and outlook. Historical extremes and peaks in the CAPE ratio (which include 1929, 1966, and 2000) coincide with major lows in the gold to S&P 500 ratio and gold stocks to S&P 500 ratio.

The next chart is similar to the first, but we include data from the Barron's Gold Mining Index (which dates back to 1938) and an attached index from 1927 to 1938. As you can see, the historic peaks in the CAPE ratio align with major bottoms in the gold stocks to S&P 500 ratio. Also, note that the action in the ratio over the past eight years resembles the action from 1956 to 1964.

In looking at the position of the CAPE ratio and the gold to S&P 500 ratio (a measly 0.43 when historical peaks were at 4, 5, and higher), we can make the argument that gold appears to be at the start of a new secular bull market. The relationship between gold and hard assets to the stock market means that equities will move into a new secular bear market.

The history between gold (hard assets) and the equity market is intertwined. Neither can be in a secular bull market or bear market simultaneously. In addition, major, multi-decade breakouts have occurred early in a new regime and therefore color the landscape of the years ahead.

The chart below shows the three major multi-decade breakouts in the S&P 500. These occurred in 1950, 1982 (Dow Jones breakout), and 2013. These breakouts occurred around the same time hard assets and gold peaked. Those peaks were in 1951, 1980, and 2011. Note how the breakouts led to bull moves that lasted many years.

Gold has enjoyed only a few major, multi-decade breakouts like the stock market, but the current one will be its third. The first two breakouts were in 1971 and 2005. gold enjoyed another nine years and six years of upside before significant tops. Note, the stock market peaked in real terms in 1968 and in nominal terms in 2000.

While gold's outlook is very good for the remainder of this decade, let me focus on the next few years. gold has formed a textbook and very bullish cup and handle pattern. The measured upside target comes in around $3,000, while the logarithmic target, which is measured by taking the depth of the cup in percentage terms and multiplying that by the resistance level, gives us targets that range from $3,700 to $4,100.

In studying the several examples of multi-year cup and handle patterns in major markets, I found that these markets ultimately moved well beyond the logarithmic target. I also found that these markets reached their logarithmic targets six to 12 months after hitting their measured upside targets.

In gold's history, it has been able to gain roughly 100% a handful of times over two years. Gold has the setup for that to happen again. If we take that history and apply it to the January 2022 low of $1,780, we get a potential target of over $3,500 in early 2024. Considering this history, the upside targets from the cup and handle pattern, and the fact that there is limited time between the measured and logarithmic targets, we could see $4,000 gold in 2024. That could entail silver breaking $50 in 2024.

Gold and silver and specifically select junior mining opportunities offer a potential wealth-building opportunity over the next few years. The overwhelming risk is being out of this market.

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