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.

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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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.

Report: Gold Prices to Increase Over $200 in Three Months

With a strong performance in 2019 nearly in the rear view window, a pair of analysts predict even more in 2020. Here’s why they believe gold will surge.

In his latest piece, Forbes contributor Simon Constable looked at some of the reasons why analysts are calling for gold’s price to jump to $1,700 as early as March. A recent report by Wolfe Research examined the up-and-down price patterns of various financial assets, noting that gold’s pattern is signaling a 15% move up over the next couple of months based on previous performance.

John Roque and Rob Ginsburg, the report’s authors, have analyzed the gold market’s technical chart and found a persistent pattern dating back to 2015. Since then, there have been seven instances where gold has taken a sideways turn on the chart for a prolonged period of time after a price spike. Roque and Ginsburg explained that these instances of sideways price movement, such as the one seen over the last couple of months, serve to form a new and considerably higher base for the metal. As historical precedent shows, each of these sideways turns is followed by a conspicuous price gain averaging at 15% over the next 75 days with a median gain of 14% over the next 83 days.

Although Constable notes that the average percentage means that the amount gained over the next three months could vary, the analysts are certain that we are seeing an eighth such pattern forming and are forecasting gold prices to jump to $1,679 by February. As the pair explains, the pattern on the chart started forming when gold climbed to $1,546 in September and then fell to $1,455 in November, which began creating a base that will lead to the predicted breakout.

However, the analysts see far more in store for gold than just a 15% percent jump over the next three months. The Wolfe report echoes the opinion of various analysts who are stating that gold is currently enjoying an unprecedented amount of momentum. While the report mostly focuses on technical movement, analysts have repeatedly said that gold is being supported by an immense amount of tailwinds, including a deteriorating global economy, a slew of geopolitical risks and the looming threat of a supply glut in the not-too-distant future.

Regardless of whether gold meets the $1,679 mark by February or trends a bit lower, Roque and Ginsburg have few doubts that the current cycle of price gains stands on much stronger footing than previous ones. Therefore, no matter how much gold gains in the short-term, the pair expects the cycle to culminate in gold surpassing its all-time high of $1,900, last seen during the financial crisis of 2011.

Hedge Funds, Central Banks Seeking Protection with Gold

With gold prices dipping in the past few months, here’s why some of the most prominent of these institutions took advantage of the buying opportunity.

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In an interview with Kitco News, Phil Streible, senior market strategist of RJO Futures, shared his views on why some of the largest buyers of gold seem to be stockpiling the yellow metal despite a lack of overt volatility. Even though the latest batch of economic data that revolves around lower interest rates has held up, actions from big investors and central banks alike suggest that both could be preparing for a coming crisis.

This notion is supported by gold’s recent price pullback, which may have offered big buyers an opportunity to stock up after a major price spike this summer. As Streible noted, gold has a little more room to trend lower with major support at $1,425, meaning that these big investors could continue to take advantage of lower prices before gold bounces back to its major resistance at $1,550.

Speaking about the buyers themselves, Streible noted that Ray Dalio has been perhaps the most prominent figure in the gold market in recent weeks, having added roughly $1 billion of put options on the S&P Index. Dalio, the billionaire investor who manages Bridgewater Associates, the world’s best-performing fund, has long been an advocate of buying and holding gold, and has based much of the fund’s strategy around the yellow metal. A move like this could potentially indicate that Dalio and his team are seeing something that other investors aren’t and are making the most of an opportunity before a coming storm.

Another source of heavy gold demand has been central banks around the world, with various nations who were previously absent from the gold market raising eyebrows with their sudden multi-ton purchases of gold bullion. Last year set an all-time high record of gold purchases from the official sector, with the total year-end figure clocking in at 651 tons while most forecasters had previously expected a number closer to 300 tons. This year, many are expecting central banks to outdo themselves again, with early predictions placing the total gold purchases by central banks in 2019 above 750 or even 800 tons.

Streible thinks that there is little question that central banks are seeking protection and safety through these gold purchases. The analyst named the various trade wars currently taking place as perhaps the key reason why central banks are rebalancing their portfolios in favor of gold.

Streible also noted that, despite the U.S. dollar’s inverse correlation of gold, the greenback has pulled back alongside the yellow metal. Streible sees this as a result of lower interest rates that are pushing investors to take their money out of banks and move it elsewhere, adding that this is comparable to other fiat sell-offs during times of perceived currency weakness. Although the Federal Reserve appears to be holding a neutral view on the U.S. economy, Streible said that investors should look out for potentially disappointing trade data, scheduled for release next week.

U.S. Economic Anxiety Rises As Big Name Retail Chains Continue to Close Massive Quantities of Stores

All over the U.S., retailers big and small are closing dozens – or even hundreds – of their stores. Why is this happening and, more importantly, what does it mean for the future of the country’s economy?

Michael Snyder, the man behind the Economic Collapse Blog, is not the only one who thinks this is a sign of sinister things to come. Middle class families have long been the main driving force behind the economy, thanks to the ‘spending money’ they could put aside from their incomes. But now, as the middle class is being “systematically destroyed”, as Snyder puts it, consumer spending just isn’t there anymore.

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Large and well-known retailers like Abercrombie & Fitch and Barnes & Noble will have closed hundreds of stores by the end of 2015. Sure, part of that could be attributed to the rise of online retailing, but that’s far from the real culprit behind struggling sales: lack of money to spend.

A troubling statistic sheds light on why people suddenly have less – if any – money to spare. An analysis performed by Enterprise Community Partners revealed that one out of four American citizens now spends half of his or her income on rent. With the rest being spent on things like groceries and gas, it’s not hard to see why little is left for discretionary spending.

This situation sounds bad enough, but Snyder believes the worst is yet to come. He quotes Thad Beversdorf’s belief that consumer spending is showing “the initial signs of a severe pull back” to strike an unpleasant point: the current trajectory of our economy is eerily reminiscent of the build-up to the collapse of 2007/2008.

Snyder concludes by wondering: if thousands of stores are being closed already, what will things look like when an economic crisis truly hits the U.S.? “Once it does, the business environment in this country is going to change dramatically, and a few years from now America is going to look far different than it does right now,” he warns.