It’s been a long time coming.
But in the US overnight, we finally got it.
A massive rip higher in stocks.
The Dow Jones index surged 11.3%, the S&P 500 9.4%, and the NASDAQ just over 8%.
But the really big moves were in gold. In US dollars, gold soared to $1,630 an ounce. On Monday, 16 March, gold hit a low of US$1,450 an ounce. So it’s up nearly US$200 an ounce in just over a week.
The gold indices loved it. The large gold stock index, the HUI, jumped 13%, while the juniors, represented by the GDXJ index, moved an incredible 18%.
That means gold stocks should have another good day on the ASX today. Although don’t be surprised if it’s a little subdued.
They ripped hard yesterday. For example, Saracen Minerals Holdings Ltd [ASX:SAR] increased nearly 18%, Northern Star Resources Ltd [ASX:NST] was up nearly 17%, and Gold Road Resources Ltd [ASX:GOR] was up over 17% too.
All three are in the Crisis & Opportunity portfolio. I recommended buying GOR during last week’s plunge lower.
I hope you managed to pick up some gold stocks on the cheap too. Gold was the theme of our ‘Stop Press’ coverage, which culminated in a special roundtable event on Tuesday, 17 March.
In it, we pointed out that a liquidation event at one of the leveraged gold ETFs was partially behind the massive selling in Aussie gold stocks. It’s early days, but that correction could well be the low for gold stocks.
Especially Aussie gold stocks.
Gold in Aussie dollars soared to another all-time high overnight. It’s trading around $2,740 an ounce.
What’s behind the gold price surge?
Well this is hardly surprising, but gold is looking at the torrent of money coming to fight this virus. Congress is close to signing a bill that is expected to be worth at least US$1.6 trillion.
Given the Federal deficit is already over US$1 trillion, no wonder gold jumped higher.
If you haven’t done so already, I highly recommend you check out the work of my colleague Jim Rickards. If anyone saw this sh#tstorm coming, it was Jim.
Volatile markets are not healthy
In the meantime, here’s something to keep in mind…in regard to gold and stocks: Volatile markets are not healthy. They reflect a highly uncertain environment. Sure, you’d much prefer to see stocks rip higher than plunge lower, but big moves up or down are not particularly good.
The big move you saw in US stocks overnight was the biggest since 1933. That was at the start of the bull market that went all the way through to 1937. But it also occurred nearly 12 months after the Dow hit rock bottom in July 1932.
Usually, big rallies like you saw overnight occur in bear markets. And they occur on the ‘good’ news of central bank or government bailout packages. This one ticks the box on that front.
Still, I’m keeping an open mind. There is a possibility that you saw the low for this market on Monday. When I say ‘this market’, I’m talking about the Aussie benchmark, the ASX 200.
You see, on Monday, the index plunged lower at the open. It was soon down 8%. Clearly, Scott Morrison’s grave and worrying ‘shutdown’ edict on Sunday night had spooked investors. They wanted out on Monday morning.
But after that initial dump lower, the market started heading higher. Then yesterday, it jumped more than 4%. Futures suggest another big day today, with the market expected to surge nearly 6%.
Have a look at the chart below to see why I think you may have seen the bottom. The line going through the chart is the 38.2% retracement level of the whole bull market move from the 2009 low to the early 2020 top.
This is a Fibonacci level, a ratio that is important in nature and markets. It means that prices have given back 61.8% of the gains made during the great bull market.
That 38.2% level is important. It also coincided with the 2016 low. The fact that it broke below this level on Monday, before recovering sharply, is significant.
Is the market merely responding to central bank and government stimulus measures? Or is it seeing through the gloom and realising that harsher lockdowns are the only way to beat this virus?
Time will tell. After the rally, we’ll get some profit-taking. The question is whether prices can hold at the recent lows, or whether more panic selling induces deeper falls.
As I said, I’m keeping my mind open. My view is that we’re not far off a historic long-term buying opportunity.
But it’s an unpopular view right now. Especially with long Centrelink queues and an economy in near total shutdown.
But bear markets aren’t pleasant. The market doesn’t put the for sale sign on stocks when the sun is shining. It only does so in the pouring rain, with hail and thunder thrown in…at night time…in winter…
You get the picture.
But we have a diversity of views here at The Rum Rebellion. My mate Vern Gowdie will be back with you tomorrow telling you why we’re on the way to another Great Depression-style market.
Remember, Vern was telling anyone who would listen back in January that markets were in line for a 65% decline this year. As often happens in bull markets, very few listened.
What’s he saying now, after a near 40% fall in the ASX 200?
Stay tuned, you’ll hear from Vern tomorrow…