Black Swans Give Gold A New Year Bounce But Why Not A Price Spike?

Black swans are unknowable and unexpected events that swing financial markets, and the New Year has seen a small flock of them propelling gold prices upwards and close to a breakout from the recent bottoming formation on technical charts. 

Today we have the first hydrogen bomb detonation by North Korea. Yesterday it was an abrupt deterioration in relations between Iran and Saudi Arabia. Over the New Year there was a ‘towering inferno’ fire in a 63-floor Dubai skyscraper, now thought to have been an accident rather than the terrorist attack it first appeared. Then Chinese stocks crashed.

Black Swans

Gold is the traditional safe haven asset that benefits almost immediately from such black swan events. Stock markets generally head immediately in the reverse direction and that is what has been happening since the New Year, although the expected Santa rally did not materialize either and so this has been the continuation of an established bearish trend. 

‘Stocks down, and gold and silver up!’ Could this be the new normal for headlines in 2016?

Only at the end of last year I was writing that 2016 could well be a year of new lows and highs for the precious metal. It seemed a very reasonable theory as the Elliott Wave technicians were looking for a 50 per cent correction from the $1,923 all-time high, so say around $960 an ounce. 

Then again as I pointed out in an earlier article on this website $1,050 was also a 50 per cent retracement, being a half-way point in the run up in the gold price since 2000. It looks as though I should have stuck to that insight. For the higher gold climbs this week the more it appears that this was the bottom in the four-year price correction. 

No deja-vu

This is not exactly a repeat of the last global financial crisis. Then gold peaked and crashed pretty much in alignment with all other asset classes. This time around gold has endured a long correction before the US stock market peaked as it now looks to have done last year. 

Still if you remember how gold performed in the global financial crisis after its initial price fall then it was definitely the place to be, tripling from its low, and only exceeded in recovery performance by silver which delivered a seven-fold increase by April 2011. 

Are the precious metals getting set up for such a price spike again? If you believe in the law that most experts miss all the key moves in financial markets then you might well think so. After all, virtually nobody put gold into their tips for 2016, apart from Marc Faber and Doug Casey who have both been too wrong for too long about gold for most investors to take notice. 

To be fair Saxo Bank did include a 33 per cent gain in silver prices in its ‘Outrageous Predictions for 2016’ but then these are not intended to be taken seriously, and presumably this gain in silver would mean a price hike for gold of at least half that amount. 

Jim Rogers

Veteran commodities bull Jim Rogers, whose book ‘Hot Commodities’ was the first to tip this asset class, often talks about how he has been waiting for a 50 per cent correction in gold prices before buying more because this correction always happens in a commodities bull market and is followed by a price spike phase before the cycle is over.

Well we just have not seen anything like a price spike in gold in the past 14 or 15 years. Now the typical length of a commodities bull market is 17 years, so might we not be due for one over the next couple of years. 

I wish I could find the email of the guy who used to write to me five years ago saying that I was completely right on gold and its future but that the real price explosion would be in 2016-17. He used to flag up a whole series of market developments and accelerated money printing that would be necessary. But I sadly have lost that list.

But I have a feeling he would be very excited by the Chinese response to the seven per cent stock market crash in the first trading session of the New Year, a massive liquidity injection. The central banks of this world have not lost their reflex reaction of printing money to paper over the cracks in the financial system. 

Junk Bonds

Increasingly this does not work. Corporate bond yields are rising and interest rates are going up. There is a liquidity squeeze and the central banks only have money printing as an answer. Even if the Federal Reserve is holding back for the moment then the People’s Bank of China, Bank of Japan and European Central Bank are committed to keeping the spigots open. 

Does that mean that the US dollar and gold can rise in value side-by-side for a while? It certainly could do, especially as a US stock market correction or crash will increase demand for US dollars as a part of this liquidation of paper assets. But as bond markets tank and yields rise alongside falling stock and real estate markets then investors will be struggling.

They will find themselves increasingly corralled into a very tight precious metals market which will become irresistible as it goes up when everything else is going down. The fight to get hold of gold and silver will then send prices into an exponential spike, the last phase of any commodity cycle. 

Gold and silver will then be like Facebook, Apple, Netflix and Google are today: massively overvalued and ripe for a fall. But investors have to get there first, and they got a pretty poor steer from most analysts this New Year. Watch out this could well be the year of the headline: ‘Stocks down, gold and silver up again!’