I wrote a blog post about cryptocurrency market cycles and how to time the crypto market but what you have to realize is that these cycles are primarily initiated by Bitcoin’s halving imo. After halving happens, buyer’s momentum takes place and new price discovery happens. Then you know how it goes, bull market doesn’t end until last sceptic is convinced that he should put his money in Bitcoin. Same is with bear market, it lasts until last bull gives hope for a better days.
This is internal mechanism of the boom and bust cycle that followed cryptocurrencies so far. First time crypto as asset class is not operating in overall bull market. Last economic expansion was probably longest so far, or second longest. These grey areas represent recessions, in between are economic expansions.
Cycles are something that people noticed long time ago.
This chart is from the book printed in 1875 from Samuel Benner, an Ohio farmer. Name of the book is “Benners Prophecies: Future Ups And Down In Prices.” As Benner said it was to inform others on how to make “money on pig iron, corn, hogs, and cotton.” It is said that Samuel Benner was a wealthy farmer who was wiped out financially by the 1873 panic. He discovered a high degree of cyclicality in his search for the reasons behind market changes.
What is amazing is how it until today shows how this analysis is amazingly accurate. It shows periods of panic, good time to sell assets and good times to buy. If you look at the top row it actually predicted great depression, WW2, dot com bubble and the COVID crash which we recently went through. Kind of mind blowing.
There are even Kondratiev’s waves which are describing how often big technological life cycles emerges.
Even the ancient Jews were aware of cycles, and that is why they made laws where debt is forgiven. Every 7 years, if you were in debt, on 8th year you would be debt free. And it did not stop there. Every 50 years if you and your family had something of value like land which was taken away from you because you could not pay debt, it was given back to original owner. If there were slaves, after 50 years they were becomig free.
As we can conclude, resets and wild swings are totally normal and expected when you think about it. Ancient Chinese described cycles as Yin and Yang which are two stages of a cycle that consistently change into the other.
But we will stick to economic cycles. What I will explain you is what I learned from Mike Maloney and this from now on is from his presentation.
There’s only so many different asset classes, and I’ve picked the three major ones:
Paper assets, like stocks and bonds
Real estate
Commodities, which include precious metals.
But precious metals are a little bit different than the rest because they’re also money. They’re a safe-haven asset in times of crisis. There are some times when commodities can be going down, but precious metals go up.
Precious metals outperformed real estate and stocks but everything went up. Stocks went up, bonds went up, real estate went up and so did commodities and precious metals.
Is that possible? Can everything go up?
Think about it for a minute. If we’ve only got so much stuff in society and if you’ve got these 3 or 4 asset classes and everybody rushes toward one, pushing it to a bubble shouldn’t it be drawing value away from the others? Shouldn’t the others be going down?
Yes they should. Except we live in a world where banks are constantly creating currency and everybody is getting a little bit of this newly generated currency, and there is always someone who is buying some assets in all asset classes. So instead of the things that are being undervalued falling, they either go sideways or they increase just a little bit, as the one asset class is going into a bubble, because of all of this currency creation.
What I will show you is based on a real-world example. It’s just a very simple diagram from the 1970s.
If gold is going up, and if stocks or real estate goes up – it was BOTH stocks and real estate in the 1970s, but I’m using stocks right now because I’ll show you the actual chart of that later… So if gold is going up at a much faster rate, and it did during the 1970s… stocks rose a little bit too, but basically they were sort of bouncing along sideways and going up a little.
If you were invested in gold, if you sold it 10 years later, you could buy many many many times more stocks, or real estate. If you were invested in stocks, if you would have sold it 10 years later, you could only buy a fraction of the amount of gold that you could have if you had you just invested in gold in the first place… Or conversely, just a spent it on food, gasoline, your house payment, a new car, whatever. Stocks did not keep up with inflation during that period of time.
But then, one asset becomes too overvalued, the other one becomes too undervalued, and the cycle reverses, and it did.
For 20 years gold went down from 1980 to the year 2000, and stocks entered a bull market that was one of the greatest stock bull markets in history until the blow off top of the tech bubble.
Then it reversed again and we’re about halfway through this cycle right now. What’s happening here is they’re printing currency right at about this rate in the middle.
This is the investors rushing back and forth from one asset class to another, but the one that’s underperforming doesn’t actually go down because banks keep on creating all of this currency and some of it goes to all asset classes.
Now take one asset class and divide it by the other asset class. It doesn’t matter which way, which direction you do this – you can take gold/Dow Jones Industrial Average, or S&P 500/gold or your house/gold… or bushel of wheat or pound of copper or ton of iron or oil barrels… What you will discover is that everything is trapped in a valuation range.
You can be invested in one thing for a very very long time, and end up nowhere.
But if you can measure when something is overvalued and something else is undervalued, you can see that because you have to measure it to be able to see it.
The trick is that you can’t see intuitively when something is overvalued or undervalued in this monetary system that’s constantly expanding. People would say: “At least my house is worth a 100.000 dollars more than it was in the year 2000” or, “it’s worth 20% more.” Well, in fact, if the inflation was 40% it actually went down in value.
When you learn to see that, then you can sell the overvalued asset class because it is going into the bubble because no asset class can be outperforming other one forever, and buy the undervalued asset class.
That’s what smart money is doing. It’s like busting these cycles apart and pasting the next wave onto the end of the last one. It is a road to true wealth.
I understand that nobody can catch the exact top of anything, and that these are much longer time frames than most people’s lifetime even. However I just want to show you the immense power of these types of gains that can be made even in conservative markets.
Price vs Value
This is in the 1920s a upper-middle class home – nice 4 bedroom large home with a swimming pool in the backyard and a decent amount of land… which was sold for about $3,000 in the 1920s, and Gold was $20 an ounce back then.
So it would have cost $3,000 or 150 ounces of gold. Conversely if you had sold the home, you could have gotten a 150 ounces of gold for it.
Then in the 1930s… and this could have been between 1928 and 1932, so it’s not very long that you had to wait to see the move. The house fell to $2,000; Gold was now $35 an ounce. That meant that this house only cost 60 ounces of gold.
If you had sold this house and bought 150 oz gold, and then repurchased when it was 60 oz of gold, ofc transferring cash to gold and gold to cash, you could have gotten 2.5 times the amount of real estate in just those few years.
Then in 1970 that house was now $30,000 but gold was still $35 an ounce, so it cost 850 ounces of gold. If you had kept this home, or more precise 2.5 more real estate in the 1930s, and then in the 1970s sold when it was $30,000 or 850 oz of gold… you would have received 2,125 oz of gold.
Then just a decade later, because of rampant inflation, the house was now $60,000 but gold became free trading in 1971 and it went from $35 an ounce up to $850, so that house was now worth 70 oz of gold – house went down from 850 oz of gold to 70 oz of gold during that period of time.
So if you repurchased real estate with your 2,125 oz worth of gold, you would have now gotten 30 of the same type of home that you sold in 1920 so you would now own 30 of them.
There was a day in 1980 when gold was $850 and the Dow was at 850 points, one ounce of gold bought the Dow. Conversely, if you cash out you could only buy one ounce of gold with the proceeds of your stocks, and then we’re going on to the biggest bubble in history.
There’s no time in history that gold was as unloved and ignored as in 1999 – 2000. It was no nation’s money and it had gone down for 20 years, it was “the worst investment you can possibly make,” nobody wanted it.
In the year 2000, gold bottoms at $250. That house was now worth $200,000 – same house, the house hasn’t changed, it’s regularly maintained of you are pinpointing. So that house is now $200,000 but gold had gone down so it now cost $800 per oz, and if you sold the house in the year 2000, you would have received 24,000 ounces of gold.
Then in 2011 gold hit $1925 per ounce and the house was now worth $300,000 but it was only worth a 150 oz of gold, so you could have in 2011 bought a 160 homes with the proceeds from taking this one home in 1920s, and just going back and forth to different asset classes.
However this cycle isn’t done yet. Gold’s price went from $35 to $200 from 1971 to 1974, and then it went back to $100 to late 1976 and then it took off and went to $850.
We’re basically in that mid cycle correction now, and it’s pretty much over with, and so now we get to see the fireworks of the end of this cycle.
The thing with the cycles is that 80% of gains happens in the last 20% of time. I don’t know when the end is going to be, I don’t know if it’s going to be 2024, 2025, 2026, cold be 2027… but I’m fairly confident is that this house will be $3,000,000 because Federal Reserve prints and prints and prints currency which kept going into real estate and the stock market, but measured in gold it’s probably going to be somewhere around 50 oz of gold.
So why are we talking about gold all the time here? That is because gold is oldest and most proven reliable store of value. It shows what is really happening over longer period of times.
Cycles are determined by debt creation because money = debt in today’s financial system. These cycles are determined by debt creation and productivity. Productivity matters most in the long run, but credit matters most in the short run.
This is because productivity growth doesn’t fluctuate much, so it’s not a big driver of economic swings. Debt is — because it allows us to consume more than we produce when we acquire it and it forces us to consume less than we produce when we pay it back.
Debt swings occur in two big cycles. One takes about 5 to 8 years (does recession ring the bell?) and the other takes about 75 to 100 years. While most people feel the swings, they typically don’t see them as cycles because they see them too up close — day by day, week by week.
If house hits 50 oz of gold as I said, that means you could buy 480 homes. Exactly the same home with which you started with in the 1920s. It’s just the same very trivial investment, just jumping from different asset classes which is the point of diversification.
The gold that you received in year 2000 from selling the house be worth about $45 million worth of gold today in 2023. If you hang on to it and bought real estate, this is about a billion dollars worth of real estate, which means that you have gone from $3,000 to a Billion dollars in 100 years.
This sounds absurd, but these are just numbers. This is an exercise on what is a wealth cycle and how big is its power. This is the maximum power, you’d have to have a lot of luck for this, but still you can catch quite a bit of this wave just by looking at numbers and making the right decisions.
Now I’m going to show you a real world example of the Dow Jones Industrial Average.
This is Dow measured in points. And what are points? Points are derived by the dollar value of the underlying stocks, so basically it’s points are dollars, and one of the reasons that they measure it in points is just like when you go to Las Vegas, they take your currency and they give you chips. Now they’re pieces of plastic, so you don’t care, you’re just having fun. So change it to points, and it’s not as bad as if “Wow, you lost so many dollars,” but “it went down so many points.”
This is a fairly old chart, it would take several days if not a week to update this presentation to today’s prices and everything. I’m teaching a concept here.
Anyway, that’s the Dow measured in points, but if you go every month during this entire graph from the year 1900 to today, and each day you take the points on the Dow and divide it by the price of gold, you get how many ounces of gold one share of the Dow is worth, and this is what it looks like measured in gold.
What you see is that it’s going nowhere. It goes up and down, but there’s a mean of about 4 ounces of gold, which means that the price of gold should be one quarter of the points of the Dow and then things will sort of be in equilibrium. It’s fair value when the Dow is only four times the price of gold, but what you see here is that it goes into, it goes from fair value into a bubble 18 ounces of gold, it crashes down to 2 ounces, another bubble of 28 ounces of gold because the bubble was bigger, then it crashed and went down to one ounce of gold. The bubbles are getting bigger because banks keep on creating more and more and more fiat currency.
Mean is an average that it goes through, and it’s going to return to that and it’s probably going to overshoot. And when it does, I think that this is one of the greatest opportunities presented to anybody in modern times, and I sort of see this as an inevitability.
The main point I want to demonstrate is that if you ride just one asset class you potentially get nowhere over a lot of your lifetime. If you had invested in the Dow in stocks in 1929, right at the peak of the stock market bubble, it would have cost 18 oz of gold to buy one share of the Dow.
If you held on to it for 89 years those stocks and sold them now, you could buy 19 oz of gold. Your return for the whole eighty nine year period was 5.6 percent, and there were periods during this time when we had raging inflation.
In other words you didn’t go anywhere. You were invested your entire lifetime and you didn’t make a gain.
You can see that there’s sort of a cycle here, actually 3 cycles.
But if you really want to see the cycle, this is the Dow measured in price of gold. But if you take gold priced in the Dow, you get this chart.
Overlay that with the Dow priced in gold, and now you can really see a cycle.
That is just a perfect cycle that you can jump in and out of, but you only have to make a few decisions in your entire lifetime to be an immense winner.
If you had invested in stocks and you ride them up, and sell and buy gold, and measure to see when gold is getting overvalued and stocks are undervalued again… then go back into stocks, and then back into gold, and then back into stocks, and back into gold.
If you had invested back here just $30 in stocks and did this technique, $30 would have become $15,000,000. That is the difference, one family creates a dynasty the other one didn’t even break even.
Again, it is almost impossible to catch the exact peak and the exact bottom of everything and to have perfect timing, but it just shows you the immense power of this. If you only catch one or two of these in your lifetime, there’s still immense gains that you can make, and you’re escaping valuation channel.
That is the most important thing – getting out of that valuation channel and actually going somewhere.
The total maximum that you could have achieved here is 50 million percent return! That’s unheard of. That would also have taken three generations, this is more than a hundred years – we’re talking about 1903 to the year 2019.
I hope you really got something from that because this is the difference between price and value – that home went up in price constantly but the value measured in gold went from a 150 to 60 to 850 down to 72 then risen to 800 and then down to 150… so it was bouncing in that valuation range that I was talking about.
What is the connection of Gold with Cryptos?
At the end, let me tell you why I used gold here. Simply gold is ultimate store of value, and many think that bitcoin is better gold, gold 2.0, and that bitcoin is even better hedge against inflation and bad economy and financial crisis.
Cryptos are new asset class, and I am not convinced that they are here to replace gold or something like that, but they have many similarities with precious metals. After all, it is not about specific asset, but about asset class(es). You can do this with any asset class, it just happens that gold and stocks are growing in shifts.
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