Ask The Expert - Michael Oliver - October 2022

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Craig: Well, welcome back once again to the Sprott Money News sprottmoney.com "Ask The Expert" show. I'm your host, Craig Hemke. It is October 2022, and joining us this month is a new guest, Michael Oliver. Some of you will be familiar with Michael through his great work. Momentum Structural Analysis is how he terms it. You can find his work at olivermsa, for Momentum Structural Analysis, .com. He's been an analyst now for over 40 years, and a well-respected voice in the industry. Michael, thank you so much for joining me.

Michael: Thanks, Craig. Good to be here.

Craig: It's really a pleasure to make your acquaintance, Michael. I know on my side, lots of folks follow your work. And I'm sure other people listening to us are big fans, too. If you wouldn't mind, just take a second and tell everybody a little bit about your work, and olivermsa.com.

Michael: Well, I got started in the futures side of the business in '75, with EF Hutton, if you remember that firm, at their commodity headquarters in New York, down at Battery Park, and I trained under the head of the department, who was also chairman of the COMEX. And this is back when gold had just been legalized for trading on the COMEX, 1975. I was a novice. I was a kid, okay.

And I learned a lot. He was an orthodox technical analyst, you know, price charts stuff, and he taught me that and so forth. But over the years, I evolved a momentum-based methodology, wherein I would plot price action, but I'd plot it as an oscillator in its relationship to certain moving averages. Now, I don't mean laying the average on a price chart. Anybody can do that, but oscillating the price. So, for instance, if today's price is $10 above the three-day average, then on a three-day average oscillator, today's high would be +10, if you follow what I'm saying.

So, when you create an oscillator, a momentum chart, and we often use very long-term means, like 3-year averages, 36-month, 3-quarter averages, so we're looking at mainly the major trends. We see different picture than what you see when you look at a price chart. And usually, and when I say "usually," I mean it without being cocky about it, 80% to 90% of the time, if a trend is gonna change, it will change first and clearly on momentum, not on price. Price will be a lagged indicator.

And so, we based our research reports on that. We cover all four major asset categories, pretty much globally, you know, equities, bonds, commodities, especially gold and silver, and the debt markets. And in today's age, those things are interrelated. What the debt markets are doing affects a lot of things, and the foreign exchange markets, etc. So anyway, that's what we do. You know, primarily, our customers have been institutional. Five, six years ago, we opened it up to individual subscribers. But we provide about five reports a week, so it's pretty intense, a lot of reading. But anyway, that's what we do.

Craig: All at olivermsa.com. And, you know, what's [inaudible 00:03:21] you mentioned working at EF Hutton. As we record this, it's October 19th. It's the 35th anniversary of Black Monday. Where were you that day, just out of curiosity?

Michael: Well, I wasn't there. I had been there prior to that, going back and forth to New York, starting my business, actually. That's when the Al-Qaeda blew up the World Trade Center. It was a parking lot in one of the World Trade Centers, if you recall that, and, where they had a bomb go off in a garage, parking. Yeah, and I think it killed a few people. But, you know, they came back and finished the job. They apparently figured, "That didn't work. Let's try something else." And sure enough, years later, they came back. But no, I was not there at the time of that event. I was down in North Carolina, I believe.

Craig: Hard to believe it's 35 years [crosstalk 00:04:12.670].

Michael: Yeah, it's that long. Yeah.

Craig: My goodness gracious. All right. Well, and one more thing before we get started. Please, everybody listening, remember that this is all brought to you by sprottmoney.com. There's a couple things you can do to thank them for bringing you this great content month after month. You can go to sprottmoney.com. Always check them out for their deals on physical metal, and on storage of that metal. Great deals all the time. You can actually call them as well, at 888-861-0775. But hey, if anything, just shoot them a like or a subscribe, on whatever channel you're listening to, and that'll help them spread the word on precious metals as well.

Michael, let's get started. I've got seven questions for you. The first one, I guess, actually, kind of plays right off of what you were just discussing. This person doesn't really understand traditional technical analysis, but would like to learn more. Where would you send someone just to get a kind of a basic education in technical analysis?

Michael: Oh gee. Actually, the best book is a guy I knew back at Hutton, and his name is Arthur Sklarew. I don't know if he's still around or not. Sklarew, S-K-L-A-R-E-W. You can go to amazon.com and find Arthur Sklarew's book, called, it's [inaudible 00:05:33] recall the title. It's "Techniques of a Professional Commodity Chart Analyst." It's probably the best book I've ever read on orthodox technical analysis. He does venture into a few other, into some momentum-type things. But it's a great book for beginners, and I think it's got solid ideas, unlike a lot of technical books that tend to go off into almost religious-type tones about the magic of this timing or something. Anyway, that's a good book I'd recommend to anybody who's just starting out.

Craig: So, it's S-K-L-A-R-E-W, Sklarew?

Michael: Yeah, Arthur Sklarew, "Techniques of a Professional Commodity Chart Analyst."

Craig: All right. I like it. I'm gonna check that one out myself. All right, let's move on to question number two. This gets to the heart of the matter, and current markets, I guess, in that, I think, at least my perception, I suppose a lot of people listening, is that the Fed will attempt to keep the plates spinning rather, than crash all markets, that that pivot is eventually coming. In your mind, what will be the primary cause of that pivot? Will it be a crash in the stock market, will it be something, you know, runaway selling in the bond market, maybe something in the emerging markets? Where do you think it might come from?

Michael: All of the above. But no, primarily, I think there's something that nobody's talking about. They're looking at the stock market coming down, and they're thinking, like, a normal bear market and, you know, it's, etc., etc. This is not normal, folks. The stock market is the biggest equity bubble in U.S. history. The S&P went up seven-fold due to QEs infinitum, from 2009 through 2021, and the Nasdaq-100 went up 16-fold.

Find me a bull market that had any kind of metric like that. The 1929 top was, like, a triple, okay? The dot-com bubble was hardly anything more than about a triple. The move from 2002 low to the 2007 real estate high was a double. Okay? So, when they collapsed, they were very painful. The real world felt it. But we have a bubble like you've never seen. Central bank created it, and now the central bank has pushed a pin into it. It has burst its own bubble. It will be out of their control. They can try to stop it at some point. Right now, they're helping to exacerbate it.

And I think you've gotta watch the bond markets right now. U.S. government, UK, Japanese, I'm talking government bonds now, the precious asset, right. The one the Feds, the central banks must defend, come hell or high water, they have to defend those things, regardless of what their policy intents claim to be. They're gonna have to print, print, print to defend those markets at some point.

They also have to protect against what's going on in the forex markets, because the recent dollar strength, and I say recent, since May, especially, has exacerbated the T-bond crisis in Japan and the UK, especially. And we're even at a point now where Yellen, a week ago, said she was "very concerned!" and I put quotes around it and an exclamation point, about illiquidity in the U.S. T-bond market.

Illiquidity is a disastrous term. Down is one thing. Illiquid is another. And when she used that term, she's recognizing reality out there. And she's very concerned about it. And it's gonna require at some point, now, the longer they delay, the worse it'll be, that the central banks will have to come in and defend these assets, meaning they're gonna have to print. So, they can talk all they want about a given direction, but when that asset gets into jeopardy, the game changes. And I think gold knows that.

Craig: Right. Well, you know what? I'm gonna shuffle the deck here on the order of the questions, then, because you kind of teed me up for question number three, Michael. If the Fed does cause a liquidity crisis, and it certainly seems to be trending that way, do you have a downside target in mind for the S&P?

Michael: No, except to say that it should be very painful in the real world because when you have a dozen years of artificial pricing of paper assets, not just the stock market, but muni bonds, which have collapsed huge, high-yield corporate debt, which has collapsed now such that high-yield corporate debt, using HYG, is an ETF, for example, the only thing left for it to take out are the 2009 lows. Do you remember those days?

Craig: Yeah.

Michael: Okay. So, we have a crisis. And once it comes unwound, it reveals errors that were made by individuals, corporations, and governments, all during those years, based upon false economic assumptions. Assumptions based on where will rates be, how much is the cost of money, how much is the quantity of money? If all of a sudden, the Fed tries to change that, it's like 52-card pickup. All of your assumptions go out the window, and decisions you made exposed...the errors are exposed. And even if they try to come in and rescue it, it's highly likely, and this is true in the past, by the way, that fund, that river flow, a renewed river flow from the central banks, will not go where they want it to go. It's highly likely to more so go into gold, and into commodities, to some, a lesser extent than gold. And it will find a different asset category to go into this time around.

Craig: [inaudible 00:11:05] If follow up with that, because on my side, I've talked about how, you know, they've pulled this trick now three or four times since 2009. You know, "Oh, QE was a one-off, and we're gonna raise rates back to normal," whatever that is, and run the balance sheet back down. And this is, like, the fourth time that the markets have seemed to believe them. Do you think maybe this next time everybody will roll their eyes, finally, and go, "Yeah, yeah. It is not going back to normal."

Michael: No, there's a point of disbelief. And, you know, I think there's still a belief in the Fed and its sobriety and so forth. But I think that's gonna go out the window in the next, oh, wouldn't surprise me if it goes out the window next year, meaning, faith in the Fed, having any confidence in the Fed. In fact, right now, you can hear a cacophony of voices out there from mainstream, pro-Fed type economists, who are saying, "Oops. Maybe you've gone too far. Uh-oh." And they're recognizing the underlying reality. And the longer the Fed doesn't recognize that, the worse that reality will become.

Craig: Yep. Yeah, I agree with you there. All right. [inaudible 00:12:08] go on to question four. This gets back, really, I guess, to a lot, to what you do with Momentum Structural Analysis. What cues do you look for in detecting market tops and bottoms?

Michael: The same type of things that people would look for in a price chart. For example, basing action. But the interesting thing is you'll see momentum create basing action, meaning it goes down to a certain point, and then suddenly, the momentum action starts to go sideways. Okay, build a base. But you look at the price chart, and it's still going down. So the price is not telling you that there's a basing action underway, but momentum will tell you that.

For example, well, you even start to see it to some extent in price right now among the gold miners. In July, for instance, the GDX ETF was trading just above $24, near a low. Well, heck, we've been trading either side of $24 this month. You know, it's August, Sep, Oct. Okay, it's three full months later, and we're flip-flopping around, sort of sideways, with a downside bias. But most of the momentum readings are not going down to new lows. They're making higher lows. So we're getting a deviation there between gold, gold miners, and so forth, versus what you see on the price charts. And that's, like, an early warning that, "Hey, yeah, price looks terrible, right?" Don't count on it. Price never looks good at a low. Ever. You, in fact, find any major low in gold or in the gold miners historically, and look at the price chart when it occurred, and it looks terrible. Usually, momentum, though, will not look so terrible at that same point in time.

Craig: Silver kind of looks that way too, doesn't it?

Michael: Silver, absolutely. In fact, it's our assessment that the silver-gold relationship, the spread difference between them, and we measure that continually, has now shifted positive to silver. Now, it's not bloody evident on the price charts. That's for sure yet. But, when we plot silver as a percent of the price of gold, and recently it got down to, like, near 1% the price of gold, and it flipped back up to about 1.3%, it's broken out on momentum. Not so much evident on the spread chart itself, but the momentum says the downtrend that we've seen in that relationship, which has been ongoing since early 2021, by the way, where silver has been losing value to gold... So, for more than a year and a half, silver has been underperformer. Momentum says, "Nope. Don't count on that continuing. Looks like it's turned."

So, that's one of the signs we look for, because frankly, the spread change in silver and gold is usually very telling about the net trend action of those markets, meaning, when silver shifts to an outperform status, however subtly it does so, that usually is a warning indication you're about to have a net trend positive for both markets, with silver leading. And I think that's where we are now. We're on the cusp of that.

Craig: Well, now, Michael, I've gotta shuffle my questions again, because what was gonna be the last question, I've now gotta move up to question five, because you've teed it up so perfectly. Question five becomes, what is your outlook for silver? Will it ever see $50 again, and do you pay much attention to the gold/silver ratio?

Michael: I do. We do pay attention, but we pay attention to its momentum. By momentum, for example, we have a breakout last month, where momentum measured by the three-month average of silver versus gold, plotting an oscillator again, broke out above a base that's a year and a half wide. Okay. Now, historically, if you go back to the mid-'70s, gold was coming up from the $30 range to $200 in 1975. Dropped back to $100, went up to $850, dropped back to $250, went to $1900, etc., etc.

That ratio of silver to gold has swung. There are many, many years in that last 40-some-odd years where silver ratio, as we measured, has risen above 2%, meaning the price of silver was more than 2% the price of gold. Well, even at current levels... let's say gold's at $2,000, okay? Two percent of that is what? Okay? It's off the page. It's way above where we are now. Silver's been at 6.5% the price of gold. Several times, it's been up above 4% the price of gold, over the last 40-some-odd years. So there are many moves where silver has been up to 4% to 6% over of the price of gold.

Well, now let's go back to gold. Gold has produced, since the early '70s, three major bull markets, each of which was either a seven-fold move, or two eight-fold moves, measuring from bear market low to bull market high. So in other words, it's three times, in 40-something years, it's created seven to eight-fold bull markets. We certainly have a fundamental environment that would justify another major bull market. In fact, we're probably in the middle of one. Well, our last bear low was at $1050. If it merely went eight-fold again, replicating prior bull market trends of the last 40 years, it'd be $8,000 gold. Well, if silver were merely at 2% of the price of gold when that occurred... Okay?

Craig: [crosstalk 00:17:31]

Michael: So, what, $200 plus. Okay. So, its potentials, on the assumption that there's more gold bull market here, which we think there is... We think we're only in a big pause period. And silver goes to its normal ratios... Like I said, in many of the years of the last 40, it's been over 2%. The majority of them, in fact. And then gold went to a normal eight-fold move, at some point, you know, a year or two from now, due to the financial crisis that's now developing, silver could easily be couple hundred dollars an ounce. So, could it go to $50? Yes.

Craig: [crosstalk 00:18:06.450].

Michael: It would not be abnormal whatsoever, and I don't think it would stop there.

Craig: In your, I guess, historically, you know, watching these prices, the current 1% or so, or expressed differently, a ratio of 100 to 1, that's pretty unusual.

Michael: That's pretty low. Yes, it is. There've been times before that we've been this low. So it's not that unusual. But it is an extreme. And so, if you like buying low, think about buying silver versus gold now. Okay? Unless your assumption is gold's going to $200 or something, you know, and it's all over. If you assume that, you don't understand what central banks are all about. They create paper money, and they do it primarily to defend government debt. And that's where the crisis is now...we're now facing.

Craig: And getting worse. Okay, Mike. Just two questions left to go. The sixth question goes back to gold, and the gold miners. You'd mentioned some of your momentum analysis looks like perhaps GDX is basing. Question six was just simply that. Do you expect gold and the gold miners to turn higher soon?

Michael: Yes, and we've said some nasty words about gold miners a few years ago. There's a broad general observation that the miners are like...and silver, to some extent, too, is this true, are like little yapping dogs on a leash. Gold is the mama. Gold holds the leash, and ultimately determines the major trends. But even when gold has a modest pullback on a percentage basis, the gold miners go berserk on the downside. Get an XAU chart, for example, Philadelphia Gold/Silver Mining Index, it goes further back than GDX, and overlay it. Go back to 1999, for example. Gold was making another bear low then at about $250, and went to $1900 within the next, what, decade.

Look what XAU has done over all those years since then. It's gone back down under $100 repeatedly, gone well up, and while gold makes continually ascending, sharply ascending lows, in other words, an upward curvature trend over the last 20-plus years, the gold miners keep coming back down to the mat again. Now, my assumption there is that, though it's a small sector...we know that, in terms of, you know, compared to any other stock market sector. And the investors in that arena are obviously very emotional. They get very emotional on the upside, which is, of course, great if you're long. And they get very emotional on the downside. And they don't seem to understand that process. And I think we're at one of those points now where they've gotten super emotional on the downside, without solid justification. And therefore we're looking at basement bargain opportunities in the mining sector, if you take an investment-grade view of it. Now, if you're looking to trade it in the options for the next two months, then that's a different story. But I think we're now in one of those zones, again, where the gold miners should be viewed as the multiples on the upside are incredible at this point, compared to further downside risk.

Craig: All right. One last question, then. We've spent a lot of time talking about inflation. You just mentioned a few minutes ago about how that's the central bank's job, is to print cash, to fund government deficits in this current system. As in, I mean, I don't know, maybe the Fed will get it to come down some, but structurally, it seems like it's here to stay, at least to me. So, as inflation in the U.S. worsens, or at least stays the same in the years to come, do you think the S&P, equities in general, will outperform gold, or will it be vice-versa?

Michael: No. I think they're about to vastly underperform. They've done fairly well over the last 50 years, obviously, the stock market. [inaudible 00:21:52] U.S. market in particular, largely because of central bank boom-bust cycles. And this particular last one is a major boom cycle, which is now in bust phase. But no, I think, because of the nature of the bubble that was created, and therefore the unraveling of that bubble, which is going to occur, whether the Fed wants to reverse course at some future point or not, it's gonna occur, will make stock market vastly bad place to be.

In fact, it wouldn't surprise me that in the next bear market in stocks, you get a situation where, unlike prior boom-bust cycles that are re-fed with liquidity, and they go back up make a new high within several years, you could be looking at a decade or two where it's just lays in the weeds. Much like, for instance, after the 1974 bear market low, stock market was a wasteland. It rallied off that low, but then it went sideways through 1982 before it could get its engine going again.

So I think that's the kind of outlook we've got for stocks. One, major down. Two, don't count on a quick turn to the upside that sustains. Instead, expect a wasteland.

And as far as inflation goes, I think people mis-define it. We have constant inflation. The stock market bubble was inflation, meaning money chasing an asset, money created out of nothing. Just so happened that asset managers and investors allocated that river flow into the stock market. They've now begun, as of late 2020, when we called the commodity explosion at that time, and it since exploded, well before the Russian invasion, by the way, we thought that the asset flow, the river flow, would go into commodities, because they were vastly underpriced to stocks. And sure enough, that's what's been happening. And I don't think that's gonna end.

I think right now, in the commodity area, where you're getting a pullback right now... Bloomberg's down around $110. It's been up to, in the $130s, for example. We think you're probably near a corrective low, with more to go on the upside. But once investors and asset managers make that kind of long-term mental shift out of one category they deem to be now high-risk, lower reward, into something they consider low-risk, higher reward, they don't shift back within months. They usually keep that trend going for several years. And that's what I'd expect here. But commodity "inflation" is not the definition of inflation. It's the monetary expansion. Get an M2 chart and go back 50 years. From the St. Louis Fed, you can get one. Look at an M2 chart. It's gone up 20-fold since the mid-'70s. What other market's also gone up 20-fold since the mid-'70s? Gold. Inflation's been there the whole time.

Craig: Yeah. Michael, it's been fantastic. Very, very informative. And I think, for everybody listening, they can obviously benefit from learning more about you and your services. Again, they can go to olivermsa.com. Is that right?

Michael: That's right.

Craig: And your services is subscription and information you put out on an almost daily basis?

Michael: Almost a daily basis, and we describe on that site our methodology. Also, you can find my lovely picture there. Right below it is an email. You can send me an email and we'll send you sample reports, recent reports. There are also some samples on the site, but they tend to be dated. But you get a good idea of what our methodology is, and some of our past history.

Craig: Great stuff. Michael, thank you so much. I wanna remind everybody on your way out, again, please thank Sprott Money for this content. It's as easy as a like or subscribe on the channel you're listening to, or, of course, you can always pick up the phone any time you're in the market for physical precious metal. That number again, 888-861-0775. Our guest has been Michael Oliver, Momentum Structural Analysis. Michael, thank you so much for your time. It's been fascinating.

Michael: Thank you, Craig.

Craig: And from all of us here at Sprott Money News and sprottmoney.com, thank you for listening. We'll talk to you again next month.