The Simple Reason To Expect A Gold Price Upturn Very Soon

Since the lows of August the gold price and gold shares have started to outperform the S&P500 index despite the exit of capital from gold exchange traded products.

You can see this from two perspectives. First, we have a slow motion train crash in progress in the US stock market. Secondly, there is a rotation into gold and gold stocks, although that theory was challenged by price movements last week, or should we say confirmed by an obvious double bottom? 

Wall Street Crash?

Basically what happens next is a correction or crash on Wall Street and a continuation of the new upward trend for gold and gold stocks which will then decisively exit the bottom of the four-year price correction. 

The short-term traders who dip in and out of ETPs like manic depressives will soon spot this as the next momentum trade and jump on the bandwagon. Such a shift out of the very large stock market pool and into the much tighter precious metals’ market will produce a spectacular and self-propelling result for prices. 

So often in financial markets the transition that you have been waiting to see is actually staring you in the face. But market trends can’t call out, you have to find them for yourself.

Now the important point here is that Wall Street is about to take a tumble, and that is the more controversial statement, not the correlation with what’s been happening to the gold price and gold shares. That’s a fact.

Thanksgiving Date With Destiny?

There is a growing school of thought that believes the stock market is set to fall right after Thanksgiving as the prospect of the Fed raising interest rates following its December 16-17th meeting is finally acknowledged. 

Higher interest rates, and the prospect of more rises to come, are not good news for stocks. True it reflects confidence about the future of the US economy by the Fed. Then again that also confirms wage price inflation is in the pipeline and a higher US dollar. 

Both are not good for the bottom line of US Inc. Profits will suffer and the stock market is after all just a discounter of future profit flows. Lower profits equal lower share prices and a downward re-rating for the whole market. 

At the same time consider the bond markets and the flow of credit to the economy. Even a small rise in interest rates by the Fed for the first time in nine years is going to be a very nasty medicine for bonds. 

Junk Bonds

The widening gap between junk and sovereign bonds is already a canary in the coal mine for the direction of stocks and the US economy in 2016, just like the widening spread between the S&P 500 and gold and gold share prices. 

The credit market is by its very nature a leveraged cycle with an exaggeration to the upside and an exaggeration to the downside. You don’t get a small tip over for a few months and then a big recovery. It takes a full cycle to get a recovery. 

Sure the more far sighted market commentators rather than the manic depressives of the trading desks predict that this will result in a reversal of current policy by the Fed, and the introduction of negative interest rates and even a QE4 program to reboot the economy after a major Wall Street event. 

With interest rates already so low what else could the Fed do? And who’s to say it won’t have to adopt this policy next year even if it stalls on interest rates again in December? The reaction to such a decision might also be a big stock market sell-off because it would mean the economy is weaker than currently advertised. 

Minsky moment?

The Fed really is boxed in a corner this time: damned if it does raise rates, damned if it does not. The ‘Minsky moment’ for the US financial system is at hand. Your final red warning light flashing is the overvaluation of the US dollar, now at record levels. How much longer can that last and what does a recognizable top for the US dollar mean for its antithesis gold and silver? 

John Hathaway the veteran manager of the Tocqueville Gold Fund argues in his very lucid latest report that for gold prices and by extension gold stocks to break out of their four-year torpor that another financial crisis is required, and that is what we have coming down the pike. 

The author of my university macroeconomics textbook Rudi Dornbusch says that in economics you often have to wait longer than expected for things to happen but when they do things will happen very quickly. 

For gold and gold stocks the wait is almost over. Traders are openly laughing at the buy-and-hold gold investors right now, and it is hard to argue with them. 

But I recall a very successful gold trader in Dubai who I knew well just before the 2008-9 financial crisis. He lost all his money, and as a boring ‘buy-and-hold’ guy I kept mine for the recovery. Earlier this year he was back promoting a high-yielding trading program for stocks, and then spent the summer in the Dubai prison after some investors lost their shirts. 

Buy-And-Hold

Don’t listen to these siren voices now. Selling out of any asset class at the bottom of the cycle is a mistake, and probably the worst thing you can do, except to start trading for a further downside at precisely the wrong moment. 

If you are leery about gold stock selection, then John Hathaway’s Tocqueville Gold Fund is a great alternative. Why try to out pick a master of this art? 

I’ve also been watching the withdrawals of gold from the COMEX warehouses recently with interest. Really trading in this market with so little physical metal behind the paper trades is therefore increasingly risky. Perhaps that is why the big banks are taking their gold and silver out of the COMEX, not to deliberately crash it, though this is self-fulfilling.

Will we see a collapse of the COMEX and a return to valuing gold and silver through physical supply and demand? Well that is where we seem to be going on present trends, and this is a trend in the 11th hour and 58th minute. What was that about waiting for market reversals that suddenly happen very quickly?

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Business & Travel Freelance Journalist
The Business Centre
Dubai Media City
Dubai, United Arab Emirates