What Gold’s Recent Price Action Tells Us About the Stock Market Rally

Stocks are up 30% from their March lows, but one market watcher believes that gold’s recent surge in price exposes the rally as a false one. Find out why here.

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The hard-hit stock market has seen a recovery of nearly 30% since the March lows that were brought on by the coronavirus sell-off. Yet even though the stock movement seems to be giving off an aura of optimism, CCN’s Joseph Young points out that this optimism is not only misguided, but also questionable.

As Young notes, the recovery itself rests almost solely on the belief that the pandemic will subside and that the U.S. and global economies will recover. Setting aside scientists’ warnings that the nature of the virus could be seasonal, the data itself appears to point in the opposite direction, forecasting an economic contraction even in a best-case scenario where world governments get a handle on the virus.

Young expects reality to set in as soon as Q2 earnings reports are released, which should wake up investors to the true state of the economy. Most corporations have already downgraded their revenue expectations in a move that clearly signals lower productivity. As just one example of the hollowness of the stimulus-powered stock market gains, Young refers to commentary by Dave Portnoy, founder of Barstool Sports and host of a stock market show called Davey Day Trader.

Portnoy singled out the Norwegian Cruise Line, whose stock went up 20% even though the company has all but closed up shop, to highlight just how unrealistic expectations are. Yet not all investors are buying into the tale of economic recovery, as evidenced by the movement in the gold market.

Gold has posted exceptional gains over the past week, closing Friday right around $1,700 an ounce. To Young, the constant inflows into the gold market show a lack of confidence in the global economy and the many uncertainties that surround it. The stock market acts as gold’s biggest competitor, yet the metal has moved up alongside stocks both ahead of the pandemic and during its seeming resolution, suggesting that investors are plenty aware of the actual state of affairs.

Indeed, even before the first mentions of the coronavirus began to pop up, there were many warnings that stock market valuations were overblown and that the 11-year bull market was running on fumes. The flock towards the supposed safety of bonds, despite their historically low showings, further affirms a lack of belief that a recovery is underway.

As for stocks, the aforementioned warnings have only grown more intense, and Young thinks that a correction could be very close. The Relative Strength Index (RSI) of the Dow is approaching 70%, and Young notes that a 70%-75% range translates to highly overbought territory. Should a correction in the Dow occur as the world continues to reel from the effects of the pandemic, Young believes that the downturn in sentiment could be exceedingly harsh.

Strategist Predicts Soaring Gold as Coronavirus Continues to Ravage Global Economy

Prices may have moved sideways at the onset of the coronavirus crash, but this strategist expects them to take off in the coming months. Find out why here.

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Photo by Flickr.com| CC BY | Photoshopped

It has frequently been stated over the past years that the gold market is waiting for a black swan type of event in order to explode to the upside. And, to Forbes contributor Rainer Michael Preiss, the coronavirus is perhaps an even greater black swan than was necessary.

The previous weeks have seen precious metals prices respond in kind, initially being moved sideways by a wholesome market selloff before strongly returning to the path they have been on since mid-2019.

The overwhelming demand for the metal has paired with disrupted supply chains as nations seek to contain the virus, making bullion difficult to access and sending premiums soaring. The lack of supply has even prompted Russia’s central bank to consider easing off its monthly multi-ton purchases for the time being to make room for other buyers, although the nation’s strategy has only grown more gold-centered as of late. And, perhaps most impressively, gold has outperformed the greenback during an unprecedented rush to liquidity.

As optimistic as these developments are when it comes to gold’s prospects, Preiss thinks the action in the market is only starting to heat up. As Preiss points out, the global economy was already in a rough spot before the coronavirus was first mentioned, suffering from a combination of historic debt levels and overblown equity valuations. Early estimates that measures to contain the spread of the virus will cause a 20%-25% decline in global economic output paint a sordid picture moving forward.

A peaking stock market in February, driven by bullish investors who rode the wave of tax cuts and Federal Reserve rate slashes, was not enough to offset the persistent contraction in global growth. It also did little to tackle the issue of global debt, which is projected to accelerate even further and reach an incredible $257 trillion by the end of Q3. Another interesting takeaway is that corporate share buybacks played a key role in propping the U.S. equity market to its February highs, leaving the market and the economy as a whole vulnerable to an external shock.

Preiss finds it difficult to envision a scenario where gold doesn’t continue outperforming. The general consensus is that the aftermath of the crisis will result in a global recession and therefore usher in some mixture of debt deflation, declining interest rates and massive amounts of money printing. As veteran investor Mark Mobius recently reminded investors, any of these factors represent a powerful driver of gold prices on their own.

Besides the obvious issue of currency debasement due to a jump towards quantitative easing programs, Preiss thinks that a possible crisis in the global banking system would bring gold to dizzying heights due to the metal’s cherished property of existing outside said system.

Mad Money Host Urges Americans to Diversify with Gold

As the stock market takes a beating, Jim Cramer has come out forcefully in favor of buying gold. Here’s why he thinks this is the right time to make the move.

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In a recent series of tweets, veteran analyst and host of CNBC’s “Mad Money” show Jim Cramer shared his insights on the best plays that investors can make during times of unprecedented market panic related to the coronavirus.

Initially a contagion that was mostly confined to China, the coronavirus has since spread throughout the globe and has, as of Wednesday, infected more than 121,000 people and claimed over 4,300 lives. On the same day, the World Health Organization officially declared the coronavirus a global pandemic, with the WHO Director-General Dr. Tedros Adhanom Ghebreyesus mincing no words at an emergency press conference and adding that both the speed at which the virus is spreading and the ineffective response to it are giving cause for alarm.

Cramer, like many others, believes that gold is the place to be in as the crisis unfolds, stating that it’s still not too late to jump on the safe haven wagon. Cramer’s words come as both gold and the broader market experience action that ranges from peculiar to dismal.

While stocks have seen selling across the board ever since the virus began threatening global economies, last Monday was a particularly gruesome point for a market that was testing its highs not too long ago. Despite posting its worst trading day since the 2008 financial crisis on Monday, stocks continued tumbling throughout the rest of the week, as exemplified by the Dow dropping another 1,300 points on the day of the WHO’s announcement.

Gold’s trajectory has been difficult to interpret for many. Perhaps the most notable price action happened at the start of the week, when gold met numerous bullish forecasts by launching above $1,700 for the first time in more than seven years. Since then, the metal has trended lower and closed Friday’s trading session slightly above $1,500.

Although the whirlwind in the gold market might seem confusing, a look at the previous weeks shows that the price movement is in line with an overwhelming rush to liquidity. Over the past few weeks, gold was likewise affected by the broader selloff, but managed to inch back up every time as other assets kept tumbling down. Even Friday’s levels still represent a six-year high, showing that the market is far from the dire straits seen in other asset classes.

Cramer noted that the same investment rules he always sticks to are very much applicable in gold’s case, stating that people should look at an asset’s prospects and make calm decisions instead of succumbing to panic selling. With gold being perhaps the only reliable haven asset left, and with all the factors that have driven its incredible price jump since the summer of 2019 only becoming more prominent, plunges such as those on Friday represent an exceedingly attractive entry point.

Cramer rounded up his views by stating that the coronavirus has already had a severe impact on the global economy, with multiple sectors falling into recession, and that there aren’t many assets that investors should want exposure to in the current climate.

Coronavirus Pushing Gold Towards All-Time Highs

As fears grow around the globe, investors are moving heavily into gold. Here’s why analysts from Citi say the yellow metal can reach $2,000 in 12-24 months.

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According to Citi’s team of analysts, the coronavirus outbreak could be the launching pad to push gold above its all-time high of $1,900 sooner than expected. The yellow metal posted its best performance in six years in 2019, overcoming a key resistance level in $1,500 and gaining roughly 20% during the 12-month period.

Gold continued to barrel into the New Year as military tensions pushed the metal above a seven-year high of $1,600 before tracing back and remaining perched above last year’s high of $1,553. Now, gold has pushed through the $1,600 level with considerable force as investors ponder the possible ill effects that the pandemic could have on global growth, via CNBC.

Concerns regarding the impact of the coronavirus on global growth seemed to materialize last week, as Apple, one of the highest-earning companies in the world, announced that it would miss its quarterly revenue mark due to supply and demand issues largely related to the spreading of the coronavirus in China. Investors were quick to jump to safety and push gold above $1,600 on the same day. The metal’s high of $1,648 during Friday’s trading session isn’t too far off from Citi’s short-term prediction, as the team places its six-to-12 month forecast for gold at $1,700.

The real gains, according to the team, will come over the next 12 to 24 months as the same issues that have powered gold’s exceptional bullish run in 2019 become even more prominent this year, especially when paired with the potential effects of the coronavirus pandemic.

Last year, gold soared as the Federal Reserve and many other central banks turned dovish and began slicing interest rates. In the Fed’s case, the successive rate cuts came as a response to the U.S.-China trade war, a long-standing source of worry that intensified fears of a domestic recession.

As per Citi’s team led by Aakash Doshi, investors are pricing in a minimum of one rate cut this year, and global growth continues to linger in a state of contraction. These factors alone are powerful enough to keep gold’s bull run going, but Doshi noted that there is even more upside to the metal.

The analyst said that gold’s performance since the start of the year reflects growing concerns over the true state of the U.S. business cycle, which were present through much of the previous year. Furthermore, the upcoming U.S. election will add another degree of uncertainty that is almost sure to serve as a strong tailwind for the metal.

Persistent questions surrounding the effects of the U.S.-China trade war are likely to become prevalent as China’s economy and global exports begin to feel the effects of the coronavirus crisis. Paired with the new environment of negative-yielding or otherwise flimsy-looking bonds that have all but eliminated one of the few havens available during a time of a flight to safety, Doshi and his team are certain that gold can break its own record and push above $2,000 an ounce over the next 12 to 24 months.