Home » Articles » Graham Dyer: Pretty Much Everything is Headed Down

Graham Dyer: Pretty Much Everything is Headed Down

by John Rubino on May 27, 2010 · 35 comments

The latest issue of Australian analyst Graham Dyer’s newsletter begins with the assertion that most of the world’s stock markets have entered a “wave 3″ decline, which, according to Elliott Wave theory, is generally the longest and most punishing of the five-wave bear market sequence. Dyer then looks at gold and oil which, he says, exhibit similar wave patterns and are headed for the same long, grinding decline. This chart illustrates his worldview:

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  • Gargamel

    i just can’t understand how any of this makes any sense with out taking into account the expanding global money supply.

  • Nic Salad

    So even assuming everything is going down in a deflationary crash and burn, and gold reaches $250 (an uncomfortable thought at today’s prices), as a gold owner I’m still “OK”. Bread will costs $0.25 a loaf and gas $1 a gallon and effectively I’ve still retained much of my purchasing power.

    I think gold is going much higher regardless of what the charts and Mr. Elliot have to say, but either way it looks like I’m covered.

  • Ian

    It doesn’t make sense. Peak Oil, declining production of gold and most other commodities, Quantitative Easing, etc. The graph shows the past, and you can’t assume that the same circumstances apply now as we enter a world of coming shortages and the resulting global war.

  • deflation

    M3 money supply plunged. There is no money.

    And this is why everything will go down.

    Keep the cash instead of GOLD

  • systemBuilder

    The money supply is expanding far more slowly that debt is imploding. In the USA, we have a $25-$28 trillion dollar debt implosion just getting underway. Our leverage level is 363% of GDP, and traditionally it’s about 150% of GDP ($14 trillion). http://www.ece.ubc.ca/~gillies/debt/debt_to_gdp_to_2010.png

  • Bruce C.

    I have never formally studied Elliott wave theory and analysis but I do believe that conscious creates reality and that mass human events are formed by mass beliefs, and that is the basis of socioeconomics which wave analysis tries to model. So, to that extent, I think wave analysis should be basically valid.

    Therefore, rather than being able to critique the author’s analysis, I can only point out a few questions and observations that others may find useful and perhaps able to address.

    The most glaring prediction is that the a severe downturn in the global economy is at hand and that asset values of all kinds, including gold and silver, will drop to truly historically lows. But even more astonishing than that, it predicts that the dollar – and only the dollar – the ultimate fiat, albeit “reserve”, currency will actually gain in buying power. In other words, the dollar – NOT gold – will emerge as the ultimate store of value. Evidently, THIS TIME WILL BE DIFFERENT.

    Of course, this points out the most glaring omission of all: the wave analysis of the US dollar chart is curiously missing. If the wave analysis of gold’s chart suggests a strong wave down, then wave analysis of the US dollar index (or the US dollar vs gold) should suggest a strong wave higher. Clearly if the Euro, Yen and Pound all fall off a cliff then the Dollar Index (i.e., the US dollar) must rise. It’s hard to believe that that chart analysis is missing since it’s so crucial to this entire thesis.

    I’m almost not surprised that it’s missing because it seems impossible. Why the dollar? One answer from Prechter, though not complete nor satisfying to me, is that most of the world’s debt is priced in dollars. (It is 45%, but so what?) Furthermore, if human emotions, beliefs, and mental focus are the ultimate arbiters of reality, then this claim in the supremacy of the dollar is tantamount to saying that people will never lose faith in the dollar no matter how much abuse it takes. Why people’s allegiance would not switch to gold at some point, as has always happened historically, is not explained. It’s especially befuddling because I should think that if people’s moods turn negative, then an outright disgust in the dollar and all things financial (read paper-based) would be rejected. Gold would be the perfect alternative. It’s solid and an historical safe-haven.

    That’s it for now. Gotta go…

  • Ray

    I hope it goes down. While I still have cash I will buy more. Gold and Silver that is. Why? They will inject so much cash into the system and overreact the dow will rebound to 16,000 and gold will be 2500.00 and a loaf of bread wil be 10.00. The balance act will eventullay get out of control untill it collapses. If it goes low (money supply) their fear will create the hyperinflarionary depression everyone speaks of. Recall we still have T bonds to repay and an economy to keep from collapsing on their watch. The ego will push us that way. Thats my guess anyway. Educated to the point of bieng stupid.

  • Prove It

    The main problem with charting theories is that they are just stupid. I remember one “chart theorist” back in about 1990 who was saying “Dow Jones 30,000 in ten years.” He was a talking head on TV for several years. The truth is that we can’t know what will happen because there are too many variables -billions of them. We can make broad assumptions based on history and principle. One of these is that no government currency has ever retained its value a decent length of time, say 20 years or more. Gold has.

    Chart this: :)

  • Brutlstrudl

    I got your graph ,pal. It’s called, “the inverted pyramid”. runtogold.com has one on it’s homepage. As for dollar denominated debt, repudiation will come once it gets so worthless the truth is found to be lies.

  • paper is poverty

    I wonder what a wave analysis of the German stock market would have predicted in 1920? Is there any example of Elliott Wave theory predicting a hyperinflation? Right now it’s predicting a shift from widespread optimism to widespread pessimism. Well, okay, pessimism can cause a stronger currency as everyone hoards cash, but pessimism also precedes a sudden collapse in confidence in fiat paper (hyperinflation). Jim Sinclair describes hyperinflation not as an economic event but as a psychological one. Can Elliott Wave foresee such a thing?

    Also, what does the wave pattern look like for gold as measured in “stuff” (i.e. vs. a basket of commodities)? That seems more relevant, since the point of owning physical gold is to preserve the purchasing power of one’s savings. And I don’t see how a terrible social mood could possibly mean a plummeting gold price as measured in real things. Just look at the Greeks paying $1700/ounce for gold as an example of what fear does to demand for precious metals.

  • Jorent

    katla It’s about to blow, If that happens this guy may look good for a while, but I think it’s a bunch of bull.

  • Robert Happek

    All money in circulation represents debt. If that debt is repaid, then the corresponding money is taken out of the banking system and effectively destroyed. For that reason, a large scale debt liquidation by repayment of bank loans is highly deflationary. However, this is not true if debts are liquidated via defaults. When debt is defaulted upon, the corresponding cash is still circulating in the economy without any need of repayment to any commercial bank or to the Fed. So in order to avoid deflation, we need a large scale debt default or debt forgiveness. All the cash (bills and coins as well as checking account balances) would then be free money comparable to gold. That money would really belong to the people and not to the banking system. I guess the government and the banking system would not allow that to happen. They would introduce a new currency via loans in order to force the economy to pay interest and taxes.

    To sum up, we will have deflation only if debt is repaid on a large scale. If debt is defaulted upon, then the outcome could be inflationary – not deflationary.

  • Bruce C.

    I just want to post a comment on the article about Stan Klarman’s presentation that was recommended by David Ziffer (thanks) from the comments under ‘Muni Bonds ‘. See:

    (http://dailycapitalist.com/2010/05/22/seth-klarman-is-worth-listening-to/)

    With all due respect to Seth Klarman (and David Z.), he sounds as uncertain about the future as I am, or maybe more so. I know the article contained comments that were somewhat out of context but, nevertheless, to me they sounded wistful and rhetorical rather than confident.

    For example, here are a few quotes from his presentation

    “I am more worried about the world, more broadly, than I ever have been in my career. That’s because you can make good investing decisions and still end up with bad results if you reap your profits in currencies that do not hold their purchasing power.”

    “Will money be worth anything if governments keep intervening anytime there’s a crisis to prop things up?”

    “All the obvious hedges (against dollar devaluation)—commodities and foreign currencies, for example—are already extremely expensive. Especially gold. Near its all-time high, it’s a very hard moment to recommend gold.”

    Being that Seth is a deep value investor I can understand why he sees most investment opportunities as being over priced. Concerning gold, it seems to me that Seth acknowledges that gold is a traditional store of value, and if it were at all-time lows he would be a buyer. I would also wager that if he were advising people who had bought gold at, say, $300/oz I doubt he would recommend that they sell it now – even though it’s at “all-time highs” because then they would have a bunch of cash and no good investment opportunities, along with the risk of devaluation.

    I feel the same way. I bought gold and silver at much lower prices, and when friends ask me if I recommend that they buy it for themselves now, I generally say yes. But, obviously, the risk of sudden, sharp, and depressing price drops are becoming more likely, and I’d hate for that to happen to them. Long-term, however, I think gold will succeed, once again, in preserving one’s wealth/buying-power. There may be other ways to do that as well, but I’m not sure what they are.

  • Tom

    Actually, I agree gold and oil will collapse at some point because what we have here is,
    ultimately a deflaton. However, I plan on selling my gold stocks (Yamana, AUY) when
    they go SKY HIGH, just like they did in 2008 and I made 100% return on my investment.
    I bought back in with Yamana at $3, $5, and $6 dollars and I’m already in the money.
    Right now its about $11 per share. Its going to $50 before its over. Gold per ounce will
    go to $5,000 plus before it collapses. Get your gold stocks, make your profit, and then
    pull the ejection bar when its time to sell. Take your U.S. funny money dollars and buy
    some land where you can grow potatoes and survive. Don’t forget the trip-wires, concertina
    wires, piano wire, and of coures store plenty of beans, bullets, and bullion. But bullets
    rate the highest value. You better have a house full or forget it.

  • Brad Thrasher

    John Rubino, thank you again for what you do. The diversity of opinion you offer here is certainly among the best of the web.

    I read all twenty pages of Graham-Dyer, narrative is easier for me than charts. Must be all the years of reading case law. We’re in for massive deflation? M3 is contracting harder than a women in labor? Like Arthur Levitt said after he audited the National Hockey League, “You can’t trust the numbers.”

    One thing I absolutely agree with Graham-Dyer is that there is a measurable horde mentality. The key is staying ahead of it. So I’m not sure I agree with the assumptions. Again, it’s the Arthur Levitt rule.

    For the first time since 2003, I’m considering modest diversification. To that end I’m researching data mining companies that track congressional investing. As you know, FinReg won’t end the congressional exemption from insider trading rules. Yeah, keep your pitchfork sharp ;). Also looking at the indexes. It’s that or send somebody like Seth Klarman a check and flowers to his bride.

    BTW, I can explain the decline in wheat prices illustrated by Graham-Dyer. My bride and I gave up bread for Lent and have continued the diet since Easter. Trust me, despite this uncharted, merely anecdotal evidence, demand for wheat is down as is my waist by 4 belt notches. We did cheat on a recent weekend in Vegas. Then again, why go to Vegas if you’re not cheating at something.

    All the best,
    Thrash

  • gwyz

    1) Prechter has been wrong on gold since 2001, which pretty much proves that wave theory is not applicable to gold.

    2) If you look at any (and all) charts of currencies that have gone into hyperinflation, you will see a deflationary dip just before hyperinflation occurs.

    To Brutlstrudl — You got it, buddy! I like Trace Mayer’s quote (above the pyramid), which says it all (in a HUGE nutshell): “The system does not collapse but evaporate.”

    I learned an important lesson regarding gold (“precious metals”) many years ago, which is:

    1) With severe inflation, the price of gold goes up and the supply is available (i.e. “you can buy some”).

    2) With severe deflation, the price of gold goes down and the supply becomes nonexistent (i.e. “you can’t buy it”).

    Now add that concept to what I said about currency charts with regard to deflation just before hyperinflation…

    “Got Gold?” (and SILVER?)

  • Dan Lucachick

    All faith in paper currencies is being destroyed and Mr. Dyer cannot get his head around this simple fact. Silver and Gold are about to become more popular than ever before in History, as paper has become more popular than ever before in History. All of us who get out of paper and into reality will be blessed many times over.

  • Bruce C.

    Some good comments and info.

    I didn’t know that Prechter/Elliott-wave-analysis was wrong about gold since 2001. I assume that means he/it predicted flat or falling prices through to the present. I’ll check that out.

    If, in fact, wave analysis does not work for gold then it may be because the “market” for gold is too small. W. analysis may only apply to truly mass phenomena, and the gold market involves too few people compared to the broad stock markets,say.
    _____

    I recently read the April and May issues of Prechter’s “EWT” which clearly explains in detail his analysis of the DOW, similar to Dyer’s article. He basically predicts the same things as Dyer too, but there was one sentence I read that really got my attention. Here’s the quote from the April issue:

    (He predicts) “…system-wide credit defaults that could lead to as much as an 80-90% decline in the volume of dollar-denominated credits worldwide. In such an environment, surviving dollars and dollar credits will rise in value and the DOW – along with everything else not used as money – will fall in dollar price.”

    I knew before I read this that he advises investors to “seek maximum safety”, which he considers to be Treasury-only money markets and short-term Treasury bonds, and to sell all other bonds, equities, real estate, and any other assets. What struck me, however, was the phrase “along with everything else not used as money”. Of course gold and silver immediately came to mind. It seemed to me that he was surreptitiously saying that gold and silver, along with dollars, would be the only things that would not decrease in value. However, I specifically remember having read that he does not recommend gold/silver at this time, that they do not do well in depressions. So, I decided ask for clarification by submitting a question at his web site. Basically I asked, “Since gold is real money why wouldn’t it hold its buying power (along with dollars) in the deflationary period that you predict?”

    His answer (which actually came from a protégé) was interesting:

    “Because gold is not the form of money which is owed. Dollars are owed, and credit is what will deflate. Real money goes up during inflation, right? It will go down in deflation. As for the technical case, see the January 2010 Elliott Wave Theorist, Bob Prechter’s May 14 interview on CNBC and our upcoming June Elliott Wave Financial Forecast, due out May 28.”

    Does that answer make sense to any one? It doesn’t to me, and for many reasons. I’m going to follow up on this with some more questions for “him”, but I want to think this through to help formulate them.

    In any case, I own precious metals and I own cash, and I’m far more concerned about my cash than I am about my metal, regardless of what ultimately develops.

    I can’t imagine being in all cash for the next 6 years like Prechter advocates. He thinks that we’re going to have “JUST” a severe deflationary depression, like the 30’s but deeper. I think that what’s coming will be far different and far worse than that, and I just don’t see dollars being the only thing of value. That’s almost a joke in fact.

  • Brutlstrudl

    To those of you that checked out the inverted pyramid at runtogold.com, please note that just above gold is PHYSICAL in your wallet paper money, the most valuable of which will be US FRN’s. This is the last stop before the end of the line at physical gold and IMO silver too. Yeah, even though I’m a big fan of Rubino’s, I’m a deflationist. I believe that no matter how determined central banks are, natural market forces will kick their ass.

    Sincerely, in bullion, cash, and superior firepower, Brutlstrudl.

  • Steve P

    Tea leaves borderline rubbish.

    The main problem that I have with W theory is that the same emotions the world had x time ago when the world had + x oil is completely different.

    It is folly imo to suggest a model based on past performance will PREDICT future performance when, as another poster has shown, the variables are abundant and constantly changing.

    To me W theory is rubbish.

  • Brutlstrudl

    Steve, you may be right about wave rubbish, but in any case, bullion and a few choice gold miners is a good hedge

  • Desert Dan

    These deflationists, at least Harry Dent extrapolated demographics (he believes we’ll have $10-20 oil for the decaded of the 2010′s); Prector and his waves. These guys believe the US$ will become a precious egg; the typical social security recepient getting $1100/mo. will see their purchasing power increase to where they will be taking monthly cruises, quarterly world travel, giant RV’s, send their grandkids to college, get facelifts,etc. Of course gov revenue will fall through the floor, but those lucky enough to hold a few UD$ will live like kings. F…king morons……

  • Brad Thrasher

    @Bruce C.,

    FOFOA makes the case that the price of gold will rise as it is the tried and true store of debt. In other words, debt determines the price of gold.

    http://fofoa.blogspot.com/2010/05/reflection.html

    In poker parlance you should call Prechter’s wave analysis and raise him one FOFOA.

    All the best,
    Thrash

  • DosZap

    “I would also wager that if he were advising people who had bought gold at, say, $300/oz”.

    Stop and think about this, at the LOW for Gold, $257.00+/-, Slvr @ $2.50oz., we were in a Super Boom Cycle…………….( US).
    People had great jobs, more work than they could do, and people were CASH flush, and bought everything their lil hearts desired.
    Buying a static asset was the LAST thing MOST Americans were doing.

    Now,in the CURRENT condtions, we have NEVER seen anything like this in our lifetimes, nor OUR countries history, OR the World.
    Back when this Globalization crap started, I knew it was going to eventually bite us.

    When the US had a recession, the majority of the other countries, may have had a slowdown,or were , or were not affected at all.

    Prior to Globalization, if the US caught a cold,it was said the world got pnuemonia.

    Now, it’s like 10 people, One get’s cancer…………….poor guy/lady.
    Now, when One get’s cancer, everyone get’s it…………..

    Thanks so much for trying to STOP WAR,(what a joke) that in your efforts you in effect ruined the entire world’s economic systems.

    Prechter, is a very smart man, however as stated, YOU cannot base our CURRENT problems, with PAST history……….
    There is NO viable track record to go by.

    We’re in a totally new Paradigmn……………..a Teutonic shift.

    Deflation?,Yes, at first, then inflation(if we’re lucky), not Hyper Inflation.

    Gold, Currency ( they were valuable in the 30′s), currency actually had a backing,( Gld & Slvr) also we were the largest creditor nation on earth…………….
    Gold had value then, it was money, it is money, and as we all know, it’s the ONLY real Money.

  • kumanari

    If you notice Prechter’s public articles are teasers, then he plugs his service.
    Alf Fields broke with Prechter in early 2002-3. The deflation we will experience will be minor compared to the ensuing hyper/inflation. The main issue is currency collapse, you want physical metals period. Armstrong,Sinclair, Fields study them. Nassim Taleb also, no one knows how this will play out too many Black Swans coming this way.
    Many people in this industry have been compromised to keep the sheeple confused. Alf stopped writing because people were trading off his writings at the risk of losing everything when this goes parabolic. The above persons sell NOTHING, they freely give knowledge. Time is short, it is not about money it’s about survival.
    We are transitioning to a new world were the ability to recognize, adapt, and change will be the most valuable assets. Get correct.

  • Redrum

    What seems confounding…that there is so much money printing yet little inflation–is actually easily explained. As fast as it’s printed, it disappears in depleted share prices, collapsing real estate values and lots of it finds its way into banks that hoard the money against the time bombs on their balance sheets. The seeming lack of inflation will encourage governments to hyperprint; when the false boom starts, this cash comes out of the mattresses and bids everything up. The timing of this scenario, your guess is as good as mine. Whipsaws galore are going to continue to hammer us. Mattress time!

  • Justin_N_IL

    We are in unchartered waters here. The end of an era of a great many things including a mind boggling population explosion. Undoubtedly there are some very unique experiences coming mankind’s way. To forecast in detail proves troublesome. Though one could use a broad stroke to paint global social chaos along with a great suffering. The NOT so great world of globalization ;(.

    45% of the world’s debt is priced in Dollars? Hmmmmm, imagine that. Not to mention the vast number of currencies pegged to the dollar and so forth and so on. The FED Reserve has weaved a global web of deceit. The dollar is truly the whiskey bottle of the world and the world is about to get on the wagon(In regards to the Dollar) a.k.a. repudiate.

    Justin_n_IL

  • Bruce C.

    Desert Dan,

    that observation – that SS recepients would live like kings in a severe deflationary environment – is profound. That does seem absurd but it could happen. The Baby Boomers may have the last laugh yet. I mean, do you think the gov. would reduce SS payments? They’re going to have to print money anyway to service the debts and deficits, what’s another 500 billion or so per year? Seriously. I’m not saying that such a thing would be sustainable, but that train left the station 10 years ago.

    ______

    Thrash,

    Thanks for the reference to http://fofoa.blogspot.com/2010/05/reflection.html.

    I must say, however, that I rarely understand this guy(?). Maybe he writes too cryptically and uses too many acronyms and economic shop talk that I don’t understand. (What does FOFOA mean anyway?) I rarely can get through an entire paragraph without wondering what the previous one said. It does seem, however, that something profound is embedded in these articles, and his fans seem to get it, so I try.

    Here’s my take on what I think I read, and if any one else has anything to add I’m all eyes.

    He seems to be speculating upon the future price of gold (in dollar terms, again, so stir the pot). He likes the idea of a one-time revaluation such that all of the global debt can be paid off with half of the gold in the world. Well, not all of the current global debt, only the debt that remains after some of it is allowed to collapse or be re-structured, and this is a crucial point. Since there is a discrepancy in the debt/gold ratio among various countries, some adjustments need to be made (i.e., credit defaults and wealth transfers) to bring them more or less equal before the revaluation can occur, at least politically speaking. All in all, he figures that would imply a spot price of between $50k and $100k.

    Now, here’s the good news as he sees it: Individual investors, like you and I, will get to enjoy this windfall, just like the big boys. Sure it’s not fair to those who don’t own any gold, but, “what else is fair in this world?”, he asks. Furthermore, not to kick the proverbial gold-less chump in the balls, a friend of his figures gold may be about $500k/oz.

    All this, however, depends upon the US having physical possession of the gold it claims to have (which is about 8,300 tonnes – and isn’t it odd that such a thing is so hard (impossible ?) to confirm, but I digress.) But, if the US has a brown bottom too, then all bets are off. Gold may get stuck at only 5 or 10 k.

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  • Desert Dan

    Bruce C.

    Don’t you understand sarcasim. Of course the gov is not going to reduce SS payments; probably raise them. But lets see; deficit this year is $1.6 tril; Obama says $1 tril deficits out forever (which really is probably $1.3-1.8 tril) but, then after crash deficits go to +$2 trillion; gov prints like crazy. SS oldser still gets his $1100/mo. but instead of cruises and facelifts it buys catfood AC kept off……

  • Brad Thrasher

    Hey Bruce C.,

    Not sure what FOFOA means but yeah, he’s pretty wordy. Some people fall in love with their own copy.

    You get it. Debt is determining value. Not just of gold but of all things. Perhaps this is a function of a debt based monetary system, no?

    It does appear, for the moment anyway, that people are moving away from paper into real money as gold continues to set new highs. How high can gold go? I don’t know.

    There isn’t any other inflation hedge I trust right now. Including and especially real estate. YIKES!!!! Imagine what happens to RE when we return to common sense valuations, like rent determining value. The average house price set by 3x’s the average wage in a given area.

    We are soooooooo out of whack my friend. Paper has lost its value. Gold’s value is still being determined.

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  • Geoff

    Some estimates of the amount of Indian gold in private hands put it at 40,000 MT which would be about FIVE times the USA. Imagine the transfer in wealth? Also, if true, I suspect some of those guys would cash out. But they love their gold.

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