The Best Time To Own Gold: Aaron Hoddinott Interviews Clif Droke.
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Clif Droke is the editor of the Momentum Strategies Reportand Gold Strategies Review newsletters, providing forecasts and analysis of the leading North American small cap, mid-tier and senior mining stocks from a short- and intermediate-term technical standpoint. Clif is one of a handful of market forecasters whose reports I routinely read.
He provides a very different approach to analyzing investment opportunities and it’s that uniqueness I respect. Last summer, while many gold writers were calling for a continued rally for the precious metal into 2012 (new highs being reached), Clif was one of the few who called a top and urged caution.
He’s shed light onto some very interesting points when it comes to cycle investing – particularly in regard to the 120 year Kress Cycle. Similar to my own investment strategy, Droke believes getting in and out of a position is a much better way to build a capital base than by holding on to an investment through long-term upswings and downswings.
He’s authored numerous books on the stock market and how to analyze technical data along with macro and political shifts.
I caught up with Clif for an interview this past week and have included the transcript below. I think you’ll appreciate his take on the gold market in this exclusive interview.
Aaron: Clif, there are a lot of topics I’d like to cover with you today, but I’m going to focus on two in particular: Gold and the inflation versus deflation argument.
Aaron: One word answer here Clif. Are you a goldbug?
Aaron: In June you wrote a piece about gold mining stocks and the attractiveness of those particular equities (at that time). The summer has been rather flat for gold stocks (with marginal increases). What’s your take on these equities as we head into September and people start coming back to the market?
Clif: Gold stocks are looking a lot better, IMO, in late summer. The mining stocks had a rough spring and early summer but are trying to gain traction. You wouldn’t necessarily know that by looking at a chart of the XAU Gold Silver Index. But one thing that has definitely improved for the gold mining shares is internal momentum.
This is measured by looking at the rate of change in the new highs-new lows among the actively traded mining shares. Internal momentum tends to predict the path that gold stock prices will take in the near future. Here’s what the main internal momentum indicators look like as of mid-August:
Aaron: It has been a great run for gold over the last decade (excluding the last 12 months). Prior to 2012, gold was the best performing asset class over that same time period.
Many argue that the bull-run for gold is over. What’s your opinion on that? Has the magical run ended, or will this lackluster past 12 month period be nothing more than a consolidation phase before gold surges higher?
Clif: Historically, the two best times to own gold are at the two most critical times along the 60-year long-wave, namely during hyper-inflation (ca. 1970s) and hyper-deflation (ca. 2001-2014/15). We’re still in hyper-deflation based on the Kress long-term cycle count and the long-wave isn’t due to bottom until late 2014. That means gold should have at least one last hurrah left before this bull market ends, presumably sometime around 2015.
Aaron: In your previous writings, you talked about gold’s winning streak being snapped by increased margin requirements from the CME. I’ve talked to many industry professionals about this matter, and the overwhelming consensus is that the margin requirement increases were rather suspect. Do you believe the CME’s intentions were to protect the market and eliminate overwhelming speculation or was it more to take the wind out of gold’s sail?
Clif: I’m not a member of the gold conspiracy crowd, but in my mind there’s no question CME Group knew what it was doing in raising those margin requirements. One doesn’t raise margin requirements – several times over mind you – unless one is planning to kill the momentum behind a commodity. I don’t know why exactly CME did what it did, but I do know that it was intentional.
Aaron: There has been much debate as to which type of gold investment provides the best possible returns in this environment. If you could purchase only one particular gold asset to hold until year-end, which would it be? Physical gold, gold mining stocks, or junior gold exploration stocks?
Clif: From strictly a longer-term investment standpoint I’d have to say physical gold is the best choice. That’s an asset you can simply buy and keep in storage until the time is ripe for selling. Based on the long-wave cycle I mentioned, gold purchases even at these inflated rates should yield a return by the time the deflationary cycle has bottomed around late 2014/early 2015.
With gold mining or exploration stocks you have the additional component of uncertainty regarding the company’s management, investor sentiment, and the viability of the enterprise itself. In other words, there’s more risk in holding gold stocks vis-à-vis physical bullion.
Aaron: You stated back in May that deflation was on its way, but that it likely wouldn’t surface until 2013. With government spending so wreck-less, despite being temporarily stalled, and the ECB likely to start printing any day, why do you believe deflation to be such a threat?
Clif: Governments and central banks are notorious for being behind the curve in anticipating crises, and also for underestimating the amount of money needed to stop a crisis. We keep hearing of the Fed’s and ECB’s commitment to stopping the global financial crisis “at any cost,” yet where is the action? So far all we’ve seen in the past year or so since QE2 ended is all talk, no show.
If the Fed was serious about stopping deflation it would be vigorously pumping liquidity right now as we speak. Ditto for the ECB. As it is, these banks merely inject enough liquidity into the system to temporarily stop the deflation. Once the damage has been temporarily repaired they sit back and wait for the next crisis which is always sure to follow given where we are in the deflationary cycle. You can’t win a war on deflation by using those tactics. You have to anticipate a crisis, not react to one.
Aaron: If deflation does in fact hit our economy – besides cash – where would you park your capital?
Clif: I would think that cash and gold are the two best financial safe havens against the vagaries of deflation. You could get into short selling during deflation, but I don’t recommend this for the average non-professional investor to the inherent risk involved. Other asset categories, e.g. equities, real estate, bonds, etc. are too risky unless you’re an expert and know of some special situations in those assets.
Aaron: Given how politicized the economy and market have become, what’s your take on the upcoming presidential election? Will it make much of a difference, from an inflation (or deflation) standpoint, under a Romney administration?
Clif: On some of the major issues I don’t see much difference between the two candidates. To me, their respective opinions on health care are virtually identical for instance. Romney seems to be more of a war hawk and would probably be inclined to launch another military adventure.
This in turn would ramp up spending and could potentially make a dent in the war on deflation, though it would take a while. Romney would also probably be more inclined to favor the multinational corporations and his presidency would undoubtedly be a boon for big companies.
The problem with deflation is that it’s mainly a domestic issue, not an international corporate issue. In other words, deflation will hit the American middle class much harder than it will corporations with exposure to overseas markets. You have to ask yourself, which candidate’s policies would do more to alleviate the economic burden of the middle class? The answer, IMO, is neither.
Aaron: After narrowly surviving the credit crash of 2008, America breathed a sigh of relief. With that stated, you have a very thought-provoking opinion on the situation, backed by a ton of historical analyses. In your new book, “2014 – America’s Date With Destiny” you go over many issues facing the country’s long-term economic, social and political future. What I found particularly interesting was your analysis of the 120-year cycle and its significance in 2013-2014. Can you explain to our members the relevance of the 120-year cycle in 2013-2014?
Clif: The 120-year Mega Cycle is also known as the Grand Super Cycle and is composed of two 60-year super cycles. Sixty years approximates to an average economic long wave (or K-wave). This also encompasses the biblical Jubilee Cycle of 50 years, which is the cycle of release from debt obligations.
In modern times a generation is defined as being roughly 20 years. This means that in any given 60-year cycle three generations pass and fulfills the old saying, “From shirtsleeves to shirtsleeves in three generations.” Thus we can see that a complete cycle of 60 years normally sees a complete revolution of the economy, from poverty to riches and back to poverty again.
The overall implication of the 120-year cycle for the U.S. is that its upcoming bottom in 2014 should witness a “revolution,” much as the previous one did in 1894. The last 120-year cycle bottom ushered in the Industrial Revolution and transformed our country from an agrarian to a manufacturing nation.
My best guess is that the upcoming 120-year cycle bottom will complete America’s transformation from a capitalist, free-market economy to more of a socialist one where government exercises greater control in our lives.
(End of interview)
I’ll be sure to catch up with Clif after the US election to discuss and re-assess his forecasts. His new
book, “2014 – America’s Date With Destiny” is one I recommend picking up for any member interested in learning more about the 120-year cycle bottom in late 2014.
It explains why hedge funds are destabilizing the financial system and economy and how they will be major contributors to the coming deflationary storm of 2014. His book also explains how the expanding global debt crisis will eventually be solved and the most likely time frame for the next major war involving the US. It’s a very thought provoking book. Click here for more information.
All the best with your investments,