Indicators can be helpful tools used to determine the direction of markets and metals, especially when they perform consistently. Today, I want to point out an indicator that has accurately predicted an average 20%+ increase in the price of gold the last five times it’s been leveraged. Since 2014, this indicator has been correct every time it’s been put to the test, and current conditions appear to be setting it up for a repeat performance. We will break this indicator down, look at each instance of it being used in the context of gold price predictions, and explain why right now may be a “golden opportunity” to profit from this phenomenon by purchasing gold. Even though gold is currently priced 46% higher than the indicator showed in 2014, it is showing gold to be a bargain right now in 2021.
The 10-20 Indicator
There is not an official name for this indicator, though perhaps we can call it the “10-20 Indicator.” The 10-20 Indicator has consistently shown that whenever gold is priced 10% below the 200-day moving average (200 DMA), it tends to begin moving up strongly by an average of over 20% per day. As the chart above indicates, the 10-20 Indicator was first used in 2014, again (twice) in 2015, another time in 2016, and once more in 2018, before being activated again last week. The first step of the “Buy Low, Sell High” investment philosophy is, as the phrase would suggest, to buy when prices are low. Gold purchased at any previous instance of the 10-20 Indicator could be sold for a profit today. But indications show that on a short-term basis, the price of gold is unusually low and set to rise.
In 2014, we saw gold climb 17% after the 10-20 Indicator was tripped. In 2015, gold advanced 11% the first time, and 23% the second time. Gold moved up 20% after reaching 10-20 Indicator levels in 2016, and climbed 31% after hitting the 10-20 Indicator activation point in 2018. When we combine the average increases and divide them by five, the number of previous instances the 10-20 Indicator initiation level was reached, we arrive at an average increase of 20.40% for the price of gold. From here, the average gold trendline would put the metal’s price over $2,000 in the coming months. When we consider the effects of Basel III and the momentum already building for gold, the 10-20 Indicator seems to make the case that much stronger for higher gold prices up ahead.
Hindenburg Omen for Stocks
Meanwhile, there are indicators signaling possible trouble ahead for other investment sectors, such as stocks and bonds. We have already seen the value of existing bonds drop trillions of dollars, as nominal interest rates have risen slightly around the world. With foreign demand for U.S. Treasuries drying up, this pressure is likely to continue here in the United States. The Hindenburg Omen is an indicator that often signals trouble for the stock market. This indicator was last tripped in December of 2019. By early March of 2020, the stock market was down 38%. You can read more about the Hindenburg Omen and previous market declines here. The Hindenburg Omen was activated again last week, which may portend trouble in the weeks ahead for stock market investors. As of this morning, stock prices are down, even though the latest stimulus bill has cleared the U.S. Senate and is expected to advance to the presidential signature round after the House votes on the current Senate-modified version this week.
If we apply the 10-20 Indicator to the major stock indices, it shows stock prices currently at historic high points relative to the 200 DMA. Rarely in history have prices been more above the 200 DMA than they are today. While there may be a few days left of this trend, historically, such levels have signaled that a significant drop lies up ahead. The last couple of times we saw relative stock prices like those we see today was, first, just before the drop beginning in 2007, at the start of the Great Recession, and again last year, at the beginning of the COVID-19 pandemic. Those investors interested in buying low and selling high would be wise to consider liquidating some assets that have risen beyond sustainability in the stock market and rotating them into precious metals, at what look to be great investment entry points, no less.
$1 of Stimulus = $0.60 of Growth
It used to be that stimulus payments from the government drove the economy and stock market significantly higher, so what has changed? It appears that we have reached the point at which $1 borrowed and spent no longer equates to $1 of additional GDP growth in the economy. In other words, the effects of each stimulus enacted by Congress is having less and less impact in the economy, leading to debts that are increasing faster than the ability to pay for them. As the graphic above indicates, it will take a significant amount of future spending and debt to achieve a minuscule amount of additional revenues to pay back that debt. We are currently on track to exceed the debt-to-GDP ratio seen following WW2. This does not bode well for the future of the U.S. dollar or securities denominated in U.S. dollars.
Which brings us back to gold, silver, and other precious metals. While the appetite of foreign investors is waning for dollar-denominated securities, it is gaining for precious metals. With gold at a relative low point, as shown by the 10-20 Indicator, demand for physical metal has increased worldwide. Across the United States, and throughout central and eastern Asia, people are trading fiat currency and other paper assets for gold and silver, in increasing numbers. Senior mining executive and gold investor, Pierre Lassonde, has identified the floor for gold and silver, as determined by the buyers of physical metal in the jewelry markets across Asia and the rest of the world. He also believes we are at or near a bottom right now for gold, based on the physical demand.
Golden Opportunity to Purchase Physical
As bullion banks continue attempting to drive down gold and silver prices in the paper markets, they have seemingly hit a brick wall in the form of those buying physical metal. For those who prefer to purchase at or near support levels, the 10-20 Indicator provides one of several reasons to believe that this might be your best opportunity this year to begin or increase your holdings of precious metals. With platinum and palladium tied more closely to the performance of the economy, it might make sense to take another look at gold and silver today. They both seem to be at or near base support levels, due to the unprecedented demand for physical metal in world markets