Gold Breaks Out!

US stocks were down heavily again in Friday’s trading session. The S&P 500 and the Dow both fell around 2.3%, while the NASDAQ tanked 3%.

The buy the dip mentality that prevails during bull markets is no longer, as The Wall Street Journal reports…

Investors are approaching stock pullbacks with a reluctance last seen at the end of the dot-com era, undermining the “buy-the-dip” strategy that many say has helped drive the longest bull market in U.S. history.

Going back to the 1980s, the S&P 500 has typically rebounded after posting a weekly loss. This year, that trend has broken apart. The broad index has fallen an average of 0.04 percentage points on the day following weekly declines, marking the first time since 2002 that stocks have consistently slipped after one-week pullbacks, according to Morgan Stanley.

What’s troubling: The only years that stocks haven’t reliably rebounded following dips have been either at the start of or in the middle of a bear market, Morgan Stanley says. In some years, like 1982, 1990 and 2002, investors were hit by not just a bear market but also a recession.’

This is another sign that we are moving into a bear market. Bear markets are as much about a shift in investor psychology as they are about a change in economic fundamentals or company earnings.

A reluctance to buy after price declines indicates investors are no longer optimistic about the future. They believe prices will continue to decline, and so they stay away from the market.

And while US markets remain above the crucial support levels I have showed you in recent essays, the Aussie market will again test long term support today.

Will the promise of RBA rate cuts keep stocks afloat? I’ll give you an update on that tomorrow.

For now though, let’s look at a market that is moving in the right direction…gold.

I’ve written previously that a close above US$1,240 an ounce for gold would be a bullish development. That occurred for gold last week. Friday’s trading session in the US was particularly strong. Gold jumped US$10/ounce as the market fell hard.

As you can see in the chart below, gold is now trading at its highest price since June. It is starting to trend higher and is above the moving averages (red and blue lines) for the first time since earlier this year.

Gold Futures GCSpot (NYMEX) 10-12-18

Source: Optuma

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That suggests gold is starting to trend higher. From a charting perspective, there isn’t much stopping gold from moving reasonably quickly to US$1,300 an ounce.

And there is plenty of fuel in the futures market to get it there too. According to the latest data (which measures positions as at Tuesday, 4 December) traders were net short 58,390 futures contracts.

In other words, traders are still bearish on gold, despite signs that the trend is turning to the upside. If they cover their short positions, gold will get a strong boost.

What behind gold’s recent rally?

The reason for gold’s rally on Friday was due to interest rate comments from President Trump’s economic advisor Larry Kudlow. From the Australian Financial Review:

President Donald Trump’s top economic adviser said he expects the Federal Reserve to pause its interest-rate increases for “quite some time” after a possible hike later this month.

Federal Open Market Committee members are preparing to meet December 18-19. “I think they’re signalling that maybe they’ll do something later this month, maybe, but that would be all for quite some time,” Larry Kudlow, director of the White House’s National Economic Council, said in an interview on Bloomberg Television.’

While Kudlow doesn’t run the Fed, it’s a view the market is coming to accept. To see what I mean, take a look at the following chart. It shows the US 10-year treasury yield.

In the last few days, the yield has fallen sharply. This is an indication that the bond market sees economic growth slowing. And if economic growth slows, so will inflation and interest rate expectations.

10-year Treasury Note Yield TNX 10-12-18

Source: Optuma

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However, yields are still above support at 2.8%. If they can stay above here, the slowdown is likely to be a mild one. A break below support will suggest something bigger is brewing.

It’s especially bullish to see gold rallying in the face of a strong US dollar. The chart below shows the US dollar index. While it may be in the process of topping out here, there are really no definitive signs of that happening yet. On the contrary, the chart shows that the greenback remains in a strong upward trend.

US Dollar INdex DXY 10-12-18

Source: Optuma

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As well as a potential pause in the US rate hike schedule, gold is likely benefiting from the ongoing carnage in France. There are major riots happening across the country, in protest against Macron’s government.

According to the Organisation for Economic Co-operation and Development (OECD), the French tax take as a percentage of GDP is around 45%. That compares to Australia’s rate of nearly 28%, which is still way too high. With Macron trying to push through another tax to combat climate change, the French have had enough.

Combine this with Italy’s new centre right government (which is hostile to the Eurozone), Angela Merkel’s falling in popularity in Europe, and the future of the euro again in question…

No wonder gold is doing well!

If the bearish sentiment continues across global markets, expect gold’s role as a safe haven to only increase…


Greg Canavan,
Editor, The Rum Rebellion

Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own.

Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts.

At The Rum Rebellion, fake news and unethical political persuasion are not in the least bit tolerated. It denounces the heavy amount of government influence which the public accommodates.

Greg will help The Rum Rebellion readers block out all the nonsense and encourage personal responsibility…both in the financial and political world.

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