In this business there is no greater buying opportunity than at a bear market bottom. For those few investors able to control emotions, delay gratification, and go against the crowd, a bear market bottom is where millionaires and billionaires are made.

Unfortunately for the vast majority of traders, emotions are much stronger than logic. Most people when they see a market that has gone up for five years automatically assume that it’s going to continue to go up. And because everyone else is getting rich and they don’t want to be left out, they jump on board too. 

In reality a market that has gone up for five years is all that much closer to a top and the upside potential is limited, not exponential. Unfortunately at market tops traders are unable to think logically and all they know is that the money is coming easy. Unfortunately when something is easy, it’s usually about over.

By the same token when a market has gone down for two years dumb money investors automatically assume that it will continue to go down for the foreseeable future. Let’s face it why would anyone want to buy something that is going down when you can buy stocks, that are going up forever, and get rich quick? (This is the same mentality that was prevalent in the real estate market in 2005/06.)

Again if one would stop and think logically, a market that has gone down for two years is all that much closer to a bottom. This is how smart money investors think, they think logically instead of emotionally.

In the chart below notice how the volume exploded at the 2009 low. This is a classic example of dumb money emotional selling, and smart money contrarian buying. Now after five years we have the exact opposite. Big money is slowly selling into the rally to the emotional dumb money investors. Volume is contracting.

So if smart money is selling into the euphoria phase of this bull market, one has to wonder where they are putting their money. One need look no further than the closest bear market.

Smart money understands that all bear markets eventually come to an end. They understand that recency bias is a trap that catches investors at tops and prevents them from buying at bottoms. They control emotions, delay gratification, and understand that bear market bottoms are where the greatest buying opportunities in this business are generated. As you can see big money has been coming into this market since June in preparation for a bear market bottom.

I am cautiously optimistic that gold is in the process of completing a successful test of the June lows. If I’m correct then this will turn out to be one of the greatest buying opportunities of our lifetime.

Let me stress that this isn’t the time to swing for the fences. Picking a bottom in a bear market isn’t easy. If you’re wrong and get caught in another leg down it’s going to be painful as these can often drop 15 to 20%. 

At the moment I’m watching for signs that gold has formed an intermediate degree bottom. If that bottom can hold above the June low it will confirm that June marked a final bear market bottom, and I believe the start of the bubble phase of the secular gold bull market.

In a somewhat related vein I want to finish this article by talking about inflation. The general consensus at the moment is that there is none. That of course is nonsense. We have massive inflation right now. Inflation is an increase in the money supply. 

What most people don’t understand, including members of the Federal Reserve, is that inflation doesn’t typically flow evenly into all assets. During the beginning stages of an inflation liquidity usually flows into financial assets, as that is where the Fed targets its efforts.

Typically during the first stage of an inflation liquidity will flow into stocks, bonds, and in our case over the last decade real estate. It’s only during the second stage of an inflation when these bubbles become overvalued and pop that the inflation that’s being stored in the financial markets begins to leak into the commodity markets. At that point we “label” it as inflation.

Notice in the chart below that from 2002 to 2007 inflation expressed itself as rising stock prices and a bubble in the real estate market. During this time the general consensus was that we had little to no inflation. The reality was that we had massive inflation, it’s just that everyone was looking for it in the wrong place. Once the housing bubble and stock bubble began to deflate the inflation that had been stored in these markets began to leak into the commodity markets and the second stage of the inflation began. This culminated with a spike in the CRB and oil reaching $147 a barrel.

I would argue that we are now about to begin a second stage inflation again. It appears that rising interest rates have already pricked the echo bubble in the real estate market, and at five years the bubble in the stock market is almost certainly in the final euphoria stage. Once stocks begin to stagnate and rollover we are going to see that same process that we saw in 2007/08 as inflation leaks out of stocks, bonds, and real estate and moves back into the commodity markets
.

If I’m correct about gold forming a final bear market bottom then this second stage inflation is going to be an incredible driver for the next leg of gold’s bull market, which I believe will probably turn into the bubble phase and top some time in 2017/18.

Analysts everywhere appear to be wondering what could possibly be the catalyst to turn the gold market around. I maintain it’s the same catalyst that drove the gold bull market from 2001 to 2011. Out of control currency debasement.

Does anyone seriously think that we can print trillions of dollars out of thin air for five years and not eventually have something bad happen? The next the black swan is already staring us in the face. It’s going to be a collapse in the purchasing power of the US dollar.

Since the beginning of the year the dollar has been showing signs of extreme stress as it began to oscillate violently back and forth in what is known as a megaphone topping pattern. When this pattern breaks to the downside it is going to initiate the beginning stages of what will likely be a fairly severe currency crisis by next fall.

In this environment I think it’s going to be impossible for the manipulation in the gold market to continue. As a matter of fact I got a signal last Tuesday that indicates to me that the forces trying to manipulate gold down to $1000 have probably thrown in the towel and given up, realizing that an impending dollar crisis is about to begin.

On a cyclical analysis basis, the intermediate cycle is now running out of time for a move all the way back to the $1000 level. As you can see in the chart below the average duration for an intermediate degree cycle is between 20-25 weeks. Currently gold is on the 23rd week of this cycle.

On a smaller time frame you can see the current intermediate cycle already has four daily cycles nested within it. I don’t believe there is time for a fifth daily cycle, and a fifth daily cycle would be required if gold were going to make it all the way down to $1000. 

On top of that the current daily cycle is now stretched to 34 days which is already longer than 90% of historical cycles. What this means is that gold is very late in its daily cycle and a bottom is due at any time. The logical trigger would be on the employment report Friday, although I think the market will be expecting that so we may get a bottom earlier in the week.

Last week’s sentiment polls are also suggesting that bearish sentiment has reached levels where the market is at risk of running out of sellers. I expect when the current weekly sentiment poll comes out later this evening we will see sentiment in both gold and silver at levels comparable to the June bottom.

Source: sentimentrader.com

To top it all off I’m starting to hear some of the usual clichés that always appear at major turning points. 

“The charts are pointing down”

Folks, at bottoms the charts will always say the market is going lower. And at tops the charts will always say the market is going higher.

Then there are the numerous calls for completely unrealistic targets. I’m now starting to hear $700 price targets for gold.

I believe we are within days of a final bottom in this intermediate cycle. I think an initial 10-20% position can be taken anytime this week. Then once we get confirmation of an intermediate bottom one can start adding to that position.

I’ll say it again, if one can pick, or even get close to, buying at a bear market bottom the initial move out of those bottoms are where the biggest gains in this business are made. The first two months out of the 2008 bear market bottom miners rallied 100%. I don’t think it’s unreasonable to expect something similar this time as this bear market has been every bit as severe as the one in 2008.

And one final confirmation before I forget. Oil appears to have put in a final intermediate bottom. Look for oil to lead the commodity complex out of this bottom.