We all know what happened with gold over the past week: it jumped. Why? Pick a reason!
- North Korea testing a hydrogen bomb
- Various voting members of the Federal Reserve saying clearly that tightening is off the table in the near term
- Disappointing US jobs report
- Weakness in the US markets
- Declining US dollar
- Political dysfunction in Washington
- Gold breaking up through technical barriers
- Gold miners gaining while US markets slide
All those forces worked their magic:
That list of reasons explains the fundamental argument for gold. Broadly, I would summarize it by saying investors are gravitating to the safe haven of gold in the face of mounting geopolitical and economic uncertainty combined with a declining dollar.
Chartists don’t care much for fundamental arguments. They only look at charts. Often those working from fundamentals and those based in charts clash, but right now almost everyone is on the same page.
Looking at patterns, gold’s move up has pushed it past a few long-standing trendlines. One of those is the seven-year descending line from its price peak in 2010, which was set to collide soon with the long-term bull market line that started in 2006.
I am not one to put a lot of faith in such charts – why, for example, does the bull market line start in 2006? – but I pay attention to them because a lot of investors buy and sell based on such concepts. Gold breaking up through that descending trend will be adding fuel to the gold fire by giving technical traders confidence that this golden move is legitimate.
Whether you are a chartist or a fundamentalist, it’s apparent gold will face significant resistance at $1366 per oz., which is the height it reached in July 2016. Besting that level would, of course, do much to advance the bull market pattern of Higher Highs and Higher Lows.
This past week has done a lot to clarify that Yes, this is a gold bull market. In a gold bull market, investors take everything as a reason to buy gold. That sums up the situation today quite nicely.
As gold gets going, I like to remember where we are in this bull market. The answer: very early.
The chart below is from Bank of America Merrill Lynch and it shows private clients allocation to precious metals ETFs. During the last gold bull market, allocations averaged 7%. Today they are at just 1% and haven’t increased notably yet in this cycle.
This simply demonstrates that generalist investors have not yet rotated into gold. That is exciting. If the gold sector can strengthen as much as it did in 2016 and has again in recent months without generalist investors, imagine what it could do if generalist interest does turn to gold.
My sense is that is exactly what is starting to happen. Amidst stock market uncertainly, nuclear sabre rattling, an erratic president failing to advance any of his business-based promises, the Fed stepping back from tightening, and a greenback failing to stabilize after losing 11% this year, gold is starting to shine as the safe haven it is. And that’s even relative to bonds. As the chart below shows, gold-versus-bonds has broken up to a three-year high.
Tuesday is a great example of being in a gold bull market. The general markets were weak; the S&P 500 lost 3%. Gold, by contrast, ended the day up a touch; gold stocks levered that gain, with the GDX closing up 2.1% and the junior GDXJ ending up almost 4%.
We haven’t had many days like that yet in this gold market, mostly because the broad stock market has been climbing so incessantly. But that might be waning.
September is historically a bad month for stocks. Averaging out data from as far back as 1950, the S&P 500 declines in September. Mix that with a bull market getting very long in the tooth and investors are getting wary, one sign being that the issuance of credit default swaps this running at twice its rate last year (which shows more investors buying protection against a crash).
Breadth has been lacking in the US bull market for some time, but the dominance of a few stocks is getting ridiculous. The weighted average price-to-earnings ratios of Facebook, Amazon, Google, Netflix, Apple, and Microsoft rose 50% in the last 30 months. And during that time the gains in their collective market caps accounted for 40% of the S&P 500’s increase in value.
If that sounds familiar, you paid attention in 2000. In the Tech Bubble a similarly small sliver of tech giants created a similarly disproportionate amount of the market’s gains. And the price-to-earnings ratios of those stocks at their peak were pretty darn similar to the P/E ratios for FB, AMZN, GOOG, NFLZ, AAPL, and MSFT today.
In the Tech Bubble, those hot stocks then lost 75% of their value in the next two years. I’m not saying Amazon is going back to $250. I am saying that a correction is likely, simply because we have an unusually overvalued stock market trying to stay afloat alongside an unusually erratic US president.
On Sunday that president threatened to stop US trade with countries that do business with North Korea. That is an immense threat, since China sits right at the top of that list. It’s a jarring threat for a jittery market, one 40 to 70% overvalued against historic norms.
The editorial then continued with an analysis of how metal prices and equities – both precious and base metals – might react in the case of a broad market crash.