Last November I entered the crash-forecasting business. As explained in a blog post at the time, my justification for doing so was the massively asymmetric reward-risk associated with such an endeavour. Whereas failed crash predictions are quickly forgotten, you only have to be right (that is, get lucky) once and you will be set for life. From then on you will be able to promote yourself as the market analyst who predicted the great crash of XXXX (insert year) and you will accumulate a large herd of followers who eagerly buy your advice in anticipation of your next highly-profitable forecast. Furthermore, since a crash will eventually happen, as long as you keep predicting it you will eventually be right.

My inaugural forecast was for the US stock market to crash during September-October of 2016. The forecast was made with tongue firmly planted in cheek, since I have no idea when the stock market will experience its next crash. What I do know is that it will eventually crash. My goal is simply to make sure that when it does, there will be a written record of me having predicted it.

That being said, when I published my crash forecast last November I gave a few reasons why it wasn’t a completely random guess. One was that stock-market crashes have a habit of occurring in September-October. Another was that the two most likely times for the US stock market to crash are during the two months following a bull market peak and roughly a year into a new bear market, with the 1929 and 1987 crashes being examples of the former and the 1974, 2001 and 2008 crashes being examples of the latter. The current situation is that either a bear market began in mid-2015, in which case the next opportunity for a crash will arrive during the second half of this year, or the bull market is intact, in which case a major peak will possibly occur during the second half of this year. A third was that market valuation was high enough to support an unusually-large price decline.

A fourth reason, which I didn’t mention last November, is that if the bull market didn’t end last year then it is now very long-in-the-tooth and probably nearing the end of its life. A fifth reason, which I also didn’t mention last year because it wasn’t apparent at the time, is that the monetary backdrop has become slightly less supportive.

So, I hereby repeat my prediction that the US stock market will crash in September-October of this year, but if not this year then next year or the year after. My prediction will eventually be right, at which point I’ll bathe in the glow of my own prescience and start raking in the cash from book sales.

When the oil price was bottoming at around $26/barrel in February, most fundamentals-oriented oil-market analysts were anticipating additional weakness due to the likelihood of a continuing supply glut. In most cases they have remained bearish throughout the price recovery from the mid-$20s to the low-$40s due to the same supply-glut belief. Regardless of whether or not a sustainable oil price bottom was put in place in February*, this line of reasoning was/is wrong.

The line of reasoning was/is wrong because in the commodity markets the fundamentals always appear to be lousy at major price bottoms. In fact, as far as I can tell there has never been a major price low in the commodity markets when there did not appear to be excessive supply relative to demand for as far as the eye could see. Similarly, there has never been a major price high in the commodity markets when there did not appear to be either abundant price-boosting demand or inadequate supply for as far as the eye could see. The markets work this way because at some point during a bearish trend or a bullish trend the supply-demand story underpinning the trend becomes so well known that it is more than fully discounted by the current price.

Was the oil market’s bearish supply-demand situation more than fully discounted by the current price when oil was trading in the mid-$20s in February? Quite likely, because a) in real terms oil was near its lowest price of the past 40 years and b) at that point there was hardly anyone who didn’t know about the oil glut and who wasn’t well-versed in the argument that the glut would persist for years to come.

*I think that the oil price bottomed in February and thought so at the time, as evidenced by comments in TSI reports in mid-February and at the blog a little later. The price action hasn’t yet definitively signaled a reversal, but it’s possible that an intermediate-term reversal signal will be generated at the end of this week.

Contrary to the opinions of some hard-money advocates, money should not be backed by gold. In fact, money should not be backed by anything.

Money is the most commonly used means of final payment in an economy. Consequently, something cannot be money (a means of FINAL payment) and at the same time be backed by something else, because in that case it’s the thing that does the backing that is actually money. For example, during the period in which the US was on a Gold Standard the US dollars in circulation were not money; they were receipts for money (gold). To put it another way, during the Gold Standard period the US dollars in circulation were not money backed by gold. Rather, gold was money.

Criticism of today’s money on the basis that it is not backed by anything therefore contains a fundamental misunderstanding of money. Money (the general medium of exchange) can be almost anything, but if something is money then it cannot, by definition, be ‘backed’ by something else.

On a related matter, the Gold Standard is not a good idea. This is because it necessarily involves the government fixing a price (the price of an ounce of gold or the price of a currency unit). When the government has the power to manage/control something in accordance with certain rules, the government will always be able to change the rules to suit itself. A successful attempt to return to a Gold Standard would therefore inevitably be followed by rule changes that led back to where we are today.

What would be a good idea is to get the government completely out of the money business.

This post is a slightly-modified excerpt from a recent TSI commentary.

The COT (Commitments of Traders) data for gold is portrayed by some commentators as an us-versus-them battle, with “them” (the bad guys) being the Commercials. Whether this is done out of ignorance or because it makes a good story that attracts readers/subscribers, it paints an inaccurate picture.

As I’ve explained in numerous TSI commentaries over the years, the Commercial position is effectively just the mathematical offset of the Speculative position. Speculators, as a group, cannot go net-long by X contracts unless Commercials, as a group, go net-short by X contracts. Furthermore, we can be sure that Speculators are the drivers of the process because most of the time the Speculative net-long position moves in the same direction as the price.

With Speculators becoming increasingly long as the price rises, it will always be the case that the Speculative net-long position will be near a short-term maximum when the price is near a short-term high. This means that the Commercial net-short position must always be near a short-term maximum when the price is near a short-term high, creating the false impression that the Commercials are always right at price tops.

The reality is that the Commercials are neither right nor wrong, since they generally don’t bet on price direction. In some cases they are selling-short the futures to hedge long positions in the physical, but in the gold market the dominant Commercials are the bullion banks that trade spreads between the physical and futures. If trading and other costs are low enough and volumes are high enough, the bullion banks can guarantee themselves profits — regardless of subsequent price direction — by buying/selling gold for future delivery and simultaneously selling/buying the physical metal.

Consider, for example, the situation where Speculators increase their collective demand for gold futures. If this additional Speculative demand causes the futures price to rise relative to the spot price it can create an opportunity for a bullion-bank Commercial to simultaneously sell the futures and buy the physical, thus locking-in a profit equal to the spread (between the futures price and the spot price) less the costs of storage, insurance and financing. At a time when the official interest rate is near zero, even a tiny futures-physical spread in the gold market can create the opportunity for a profitable trade.

I’m going back over this old ground to make sure that TSI readers aren’t taken-in by the popular, but wrongheaded, conspiracy-centric us-versus-them characterisation of the COT information.