Inflation is the factor that drives gold and silver bull markets. The official CPI data is not a good measurement of the real rate of inflation. CPI’s calculation method is constantly being changed. This means that an inflation rate of “5%” today is very different from an inflation rate of “5%” during the 1980s.

Below is a chart from Shadow Stats. It illustrates what the current U.S. inflation rate would be if we use the 1990 calculation method. As you can see, current inflation would be much higher if we used the 1990 CPI calculation method.

One of the main reasons why our gold and silver models are incomplete is because we do not have an accurate inflation gauge. Our firm uses a combination of various inflation measurements to get the most accurate reading of inflation as possible.

U.S. inflation is very low as of October 2015 no matter what measurement of inflation you look at.

U.S. inflation is hovering around 0% according to the official CPI data. The commodity markets confirm this. Oil is stuck around the $40-$50 level, and other commodities including industrial metals and agricultural products have yet to bounce after massive declines in 2014 and 2015.
Deflation is now the watchword. If the U.S. slips into deflation (as defined by the CPI data), there’s a chance that the global economy may slip into a little bit of deflation as well. The European and German economies are stalling while the Chinese economy is already in a recession if you discard the “official” data. (German inflation was 0% for September 2015.)
Even the Federal Reserve is afraid of deflation. The Federal Reserve decided to postpone an interest rate hike in September partially because it was afraid that the current low-inflation environment might persist.

Gold and silver bull markets are caused by inflation. More specifically, gold and silver bull markets occur when inflation increases significantly. Thus, the current precious metals bear market end when U.S. inflation picks up. So what can cause inflation to pick up in the coming year or two?

As you know, our S&P 500 models state that this significant U.S. stock market correction is not over. If the U.S. stock market cannot make a new high by the middle of 2016, perhaps the Federal Reserve will initiate QE4 to save the market. Perhaps another round of monetary easing will cause inflation to increase and thus end this precious metals bear market.

There is no capitulation

Capitulation is the total surrender from bullish investors. This is a very typical phenomenon that occurs near the bottom of bear markets. We have yet to see capitulation from the majority of gold and silver investors. Thus, it’s likely that this bear market is not over. Any rally that we experience is likely just a rally within this bear market.

With silver at its 200 sma and gold going up too, investors have once again come out of the woodworks to pronounce the end of this bear market. Investors have bought into every false breakout since this bear market began, with the recent breakout being no exception.

In addition, many investors think that the bottom really is in. Gold retraced 50% of its 2000-2011 bull market ($1080). In addition, gold has a massive support at $1000. These two factors have resulted in fearless buying from bullish investors.

Real capitulation will occur if gold breaks $1000. Panic selling will follow once investors realize that the “unbreakable support level” has been broken.

This isn’t a very long bear market

Gold has been in a bear market for 4 years already, and silver has been in a bear market for almost 4.5 years. Although these are long bear markets by U.S. stock market standards, these aren’t notably long by precious metals standards.

There was a bear market that lasted more than 5 years in the 1980s.

Thus, the gold and silver bear markets still have a year or two before they reach time extremes.

By Tony Mermer

I'm Tony Mermer, founder and CEO of Investing Track (investingtrack.com). We are a privately held quantitative investment firm.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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