Is The Third Turning Imminent?

Gold and Precious Metal Capital Flows Change

September 13th 2022

by David J Mitchell  

A major capital flow shift that has only been seen twice in the last 80 years is imminently close to shifting direction for the third time.

To truly comprehend major bull markets in precious metals, one must understand that this involves a shift in global capital flows from one group of asset classes to commodities and metals.

Now we have seen capital moving into Gold since 2016 (hence the doubling of the price from US$1,045/oz up to US$2,070/oz) and while capital is slowly waking up to the commodity market (something which we predicted would start around 2020 to 2021) this was more due to ongoing global supply-demand issues and extreme overextension of the pricing anomaly that exists between the stock indices (financialised derivative products) and real-world commodities.

However, stock markets, debt markets and property valuations have performed spectacularly well since 2010 into 2021 due to extreme debt leverage that was built off the foundation of zero percent interest rates and monetary aggregate expansion by our central banks. Therefore, the excess money creation has also benefitted other assets classes without actually changing the direction of capital flow.

The charts are now telling us that the game could soon change in favour of precious metals. A major capital flow shift only seen twice before in the last 80 years looks very close to shifting direction for the third time.

This is quite a busy chart below, so allow me to explain.....

When trying to compare one asset classes’ performance versus another, we simply create a ratio analysis of one asset price divided by the other. In this case, we have taken the Gold price in USD and divided it by the S&P 500 (S&P 500, is a stock market index tracking the stock performance of 500 of the largest companies listed on exchanges in the USA).

On the left below, you will see a falling trend line from 1942 to 1970. This indicates that stock prices clearly outperformed Gold. Then the trend line broke in 1970 and rose, demonstrating that Gold out-performed the stock market. This in effect, was major capital flows moving from underperforming stock indices and into Gold (as well as other precious metals & commodities).

If you were able to recognise the clear trend lines in place and identify when they broke in 1970 and again in 2002 and bought Gold (as shown below with the large blue arrows and priced in USD), you not only enjoyed a magnificent performance in Gold, but a clear major capital flow out of stocks as it flowed into precious metals and commodities immediately thereafter.

gold versus stock markets chart

As of today, the ratio of Gold to the S&P500 index is approaching 0.41, which historically has been the major support zone and clearly represents a severe pricing anomaly between the asset classes.

The market clearly overshot this ratio valuation in the dot-com bubble of 2000, but that was an historical rarity.  Also shown in the Gold chart on the right is the cup-and-handle pattern, an extremely bullish price pattern and set up, that is indeed easy to identify on this chart.

Investors need to keep an eye on this chart above to observe the trend line breaking. As a precious metals dealer and advisory our research team simultaneously looks at a multitude of such indicators to give our clients the best possible advice.

The chart below is yet another pricing ratio, that recognises how undervalued or overvalued the commodity complex is versus the stock indices. We have taken the S&P GSCI (which is a composite index of commodities that measures the performance of the commodities market. The index often serves as a benchmark for commodity investments) and divided by the S&P500 (top 500 companies in USA stock index), and again, this is a recognition of valuation of one asset class versus another.

This ratio chart demonstrates, without any argument whatsoever, a severe pricing anomaly and global capital flows will be sure to recognise this sooner rather than later and move accordingly.

commodities versus stocks ratio chart

What could help this trend along, i.e. to observe capital flows leaving stock indices and move into precious metals and commodities at greater speed?

Well apart from the obvious macro-economic negative bias of a global recession (more accurately global stagflation, alongside falling corporate earnings and rising interest rates popping the giant debt leverage ponzi scheme) we have institutional funds that are seemingly very nervous indeed (see chart below).

SentimentTrader picked up on a chart demonstrating last week that institutional traders bought US$8.1 billion worth of put options on stock indices (the right to sell at pre-determined contract prices). They bought less than US$1 billion in calls (right to buy). This is 3x more extreme than 2008 and another very telling indicator.

 put options on the stock indices chart


Protect your wealth; invest in physical gold, silver or other precious metals at best prices from Indigo Precious Metals. Physical delivery across the world.  

Consider the safest option of segregated, allocated vault storage at Le Freeport Singapore with IPM Group.


Disclaimer : The information contained in this website should be used as general information only. It does not take into account the particular circumstances, investment objectives and needs for investment of any investor, or purport to be comprehensive or constitute investment advice and should not be relied upon as such. You should consult a financial adviser to help you form your own opinion of the information, and on whether the information is suitable for your individual needs and aims as an investor. You should consult appropriate professional advisers on any legal, taxation and accounting implications before making an investment.