- Gold’s long-term trend remains intact
- S&P 500 loses ~2% as stocks fret about excessive valuations
- Interest rates to remain below zero in real terms for ‘years’
Last week I said to readers to be mindful of a near-term ‘10%’ type correction….
And that guess might be close…
Today the market added to its correction – with the market losing almost 2%.
Here’s the thing…
Only two weeks ago we had seen a near 60 per cent vertical rally from the March 23 lows.
Valuations were ‘off the chart’ by almost every metric (e.g., Apple trading at a forward PE of 32x; and Snowflake’s IPO trading for 150x sales revenue) – as investors were seemingly happy to pay any price.
But in just 12 trading days later and ~$US3 trillion has been erased from the index’s value.
Other factors giving rise to market participant’s taking profits might also be:
– Congress now unlikely to agree on a $3 Trillion relief bill before the election (mostly for political gains);
– An increase in COVID-19 case counts in Europe; and
– the Federal Reserve failing to give the market any further guidance on how it plans to keep the rally going.
With respect to COVID – the BBC reported that U.K. Prime Minister Boris Johnson was considering another lockdown as a “circuit breaker” to curb the spread in the country.
That report comes after top U.K. government scientists warned that the daily infection rate within Britain could reach 50,000 if no action is taken.
I fear for the U.K’s long-term social and economic costs should they re-enter another lockdown.
Put it all together… and the market took well earned profit.
Repeating my language from last week:
“Net-net – this feels short-term bearish / long-term bullish. I would not be surprised to see pullback to around our 35-week EMA (around 3100) which I think will act as strong support. That’s where I will be a buyer of quality stocks (e.g. like Apple) – with appropriate capital management”
Let’s see how we go – but so far things are trading per the script.
Gold Also Pulls Back
It’s been a few weeks since I looked at that chart for gold.
In fact, it was July 31 when I said “Gold and Silver are Hot… Perhaps Too Hot!”
Gold was pushing almost $2,000 an ounce and I offered three comments:
- If you have enjoyed the run up in gold the past few weeks – take at least half profit.
- If you don’t have a position in gold – don’t initiate a long position here.
- Look to buy gold on the next dip – for e.g., closer to the 35-week EMA (or slightly above)
Let’s update the chart…
Gold – Sept 21 2020
At the time of writing – gold is trading around $1,914 per ounce – well off its $2,089 high.
I think gold has further to fall here – perhaps as far as $1,800 to $1,850.
That’s where I would be a strong buyer – with a stop loss of $1,700.
Expect Near-Term Support with the US Dollar
Adding to gold’s near-term weakness is the recent bounce in the US dollar:
US Dollar Index Finds Support – Sept 21 2020
After several weeks of strong selling – the dollar index is finding interim support (as we forecasts).
And we could see it rally all the way to the 35-week EMA – which is likely to pressure gold further.
However, that’s where I would be a seller of the world’s reserve currency.
I think the US dollar has more downside in light of the Fed’s policies and (reckless) government fiscal spending.
That said, I think it will catch a bid at 88c.
For example, if we zoom out and look at the chart from 2005 – we can see how this previous level of resistance is likely to act as a new level of support (as we saw in 2018)
US Dollar Index – 2005 to 2020
However, should the level of 88c break for the Dollar Index – it could be a long way down.
And that will drive inflation!
Just like how I’m looking to buy near-term weakness in the S&P 500 (e.g. around the 3100 zone) – I am also looking to buy the weakness in gold.
However, I think there is more downside in the very near-term.
I think the longer-term play for gold remains intact – given the sorry state of global growth and soaring public deficits.
Rates are likely to remain at zero (or negative in real-terms) as life-support for at least 2-3 years.
Lower yields are a positive for gold.
Higher yields are not.
And whilst we are slowly beginning to get on top of COVID (as infections and death rates slow) – the needless economic carnage caused by politicians is likely to last for years and will be severe.
As an aside, read this compelling open letter from Belgian doctors and health professionals regarding COVID. It’s a detailed explanation for global governments to challenge their narrative. It’s a solid collection of facts and recommendations.
But what I fear is government will stick to their narrative – cause further economic (and social) devastation.
And if this is true – then gold is likely to act as insurance.
Regards,
Adrian Tout
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