The preponderance of government debt has created a situation in which gold will trump the equities markets for years to come, according to technical analyst and gold advocate Ian McAvity.
"Gold is a mirror reflecting the loss of purchasing power of the four major currencies," McAvity asserted in a presentation at the San Francisco Hard Assets Investment Conference. The value of gold has risen, he indicated, as the value of paper currencies has fallen.
The stock market (S&P composite), meanwhile, is in one of its periodic secular "sideways" phases, which looks likely to continue for an extended period, McAvity said.
"Since 1900, 62% of the time the market basically has gone sideways in what I call secular "other" phases," McAvity said. "I think we're in one of those phases. It started in 2000 and has another five to eight years to run. And most recently I think we just put in a top, and we're in a bear market that will bottom probably just before the election next year," he predicted.
McAvity focusing much of his remarks on the government debt situation globally, noting that "debt mania" really took off between 1982 and 2000.
"From 2000 forward (governments accumulated) a monstrous amount of debt that accomplished absolutely nothing, and we're now into a period when all levels of debt have come into question. And so the efficacy of debt no longer works," McAvity said, adding: "Deficit financing does not work."
Investors meanwhile are terrified, and will now likely respond by increasing the savings rate, McAvity said. He presented information showing that the US personal savings rate at the end of 1981 was 11.4% but fell to just 1.4% by mid-2005.
"That has now turned, and I think that now you're going to see the private savings rate go up. Unfortunately most of that savings is probably going to come through cancellation of debt," McAvity continued.
The Deliberations on World Markets writer said his model shows that, regarding stock market cycles, the average bear market would have made a top last May and will likely bottom next August or September between Dow 8200 and 8500. He added, however, that current circumstances suggest that the cycle might be worse than usual this time.
"I think we will take out the (Dow) 6500 level - if not in 2012, certainly by the middle of 2013," McAvity stated. He reiterated his belief that gold will be among the safest investments during this period.
"Even as the dollar index rallies towards 90, I think you will see the gold price actually hold up and act better - and even rise - with a rising dollar," McAvity said. He added that a serious decline in the dollar in 1976-1978 prompted intervention. "The dollar bottomed and held and bounced (and) from 1978 to1980 gold ran from $160 to $850. So much for the myth that a strong dollar is automatically bearish for gold. I think we're in that same kind of circumstance now."
Gold is not a bubble, McAvity said, adding: "To get back to the inflation adjusted 1980 top you'd have to have $2,500 gold. ... "The bubble is in debt and financial assets. Gold in my view is a haven for the individual to hide in."
He added, however, that gold shares, and in particular those of the junior miners, have not enjoyed the same "haven" status but instead have demonstrated a loss of performance relative to the metal.
"The major gold shares in my view really should be bought only on days when you have a really bloody decline on the S&P. ... The juniors have been bombed out. They're going to be hurt in the next month by tax loss selling. Pick five or six names you would like to own. Look that their charts for their October lows and be a patient buyer. I think they're going to be some marvelous opportunities," McAvity told attendees.
In summary, however, McAvity said he prefers gold to the S&P: "The Dow-gold ratio has come a long way since 2000. ... How we get a $1,700 item up to $11,700, I don't know, but history says that's where we're headed, so I would rather own gold than the Dow."
Chris Munford researches and writes about commodities, with an emphasis on metals, energy, and steel raw materials. He is based in the New York area.