Gold up and Stocks Down the Right Forecast So Far for 2016

Wednesday, January 27, 2016

Almost a month into the New Year and gold price optimists are smiling while the stock marker crowd is looking pretty sick. However, global financial markets may have to shake, rattle and roll rather more vigorously for a powerful breakout in the yellow metal.

How long is that going to take? The technical charts are signaling a big fall in global stocks on a scale that we have not seen since the apocalypse of 2008-9. After so many surging years for US equities the memories of the Devil’s Bottom of 666 on the S&P 500 have dimmed.

Technical charts

But if you refer to the latest work by chartists like Clive Maund all the necessary signals of an approaching mega bear market are in place. There is a bullhorn top in the long-term Dow Jones chart that gives the downside chart a target in the 5,500 region, against 17,000 today.

In this case the rally in the gold price from $1,052 since the year-end to circa $1,117 at the time of writing is just the start of something much more significant.

Indeed the price movements for gold have already been much larger if priced in non-dollar currencies, and gold’s strong performance despite a surging US dollar is probably the most significant development in the precious metal’s market so far in 2016.

If investors start to lose faith in the almighty greenback then this will really light a fire under gold, and you have to wonder why they are quite so sure of the dollar so far this year with 10-year treasury yields down from 2.3 to struggling to hold around the two per cent mark.

What rate rise?

So much for the higher interest rates that the Fed flagged up in December with its first interest hike in nine years. They are just not happening in the bond markets, except in the junk and corporate markets where a very nasty squeeze on global liquidity is now poleaxing global trade, very much as it did in 2009 in the Great Recession.

Citibank has put the chance of another recession as high as 65 per cent in 2016. The cold weather blasting the world this month is not the only problem facing global business. Too many markets are in deep trouble, and it’s not just the oil producers.

But should we not have seen an even bigger breakout in the gold price going into 2016? The six to seven per cent plunges in Chinese stocks have been particularly alarming and Wall Street is stumbling badly.

There are several reasons why gold is taking its time to respond. First, market participants are just not sure that the gold price really has hit the bottom after its long correction and worry that there maybe one last capitulation in the price and possibly a big fall like in 2008-9.

Deja vu?

On the last point these generals should beware of always fighting the last war. Before the 2008-9 correction gold was at a high. This time is different because it is coming off a four-year price correction. The current gold price is heavily discounting a bear market that is already history.

Secondly, the ratio of oil prices to gold is very stretched. That means either that gold is overpriced or oil far too cheap. If you examine the state of collapse in the oil sector, and the huge cancellations in future exploration and development programs, then it is pretty obvious which view is correct. Still with oil prices at current levels it is hard not to be nervous if you are an investor in this sector.

However, rather than see low oil prices as some kind of a depressant to gold is this not also likely to be the very catalyst to bring financial markets down and cause the sort of chaos that makes gold shine as a safe haven? And is this not exactly what we have been witnessing in equity and precious metal markets so far this January?

Certainly the fears about the impact of a Federal Reserve interest rate increase on the yellow metal seem to have been completely unfounded as the reverse of the expected impact has occurred.

Fed losing it?

Why aren’t 10-year treasury bond yields rising and not falling? Markets are thinking interest rate rises either won’t happen or will be quickly reversed.

This is the complete opposite of the argument that Goldman Sachs made last year to depress the gold price to the low-point of its correction. And by extension Goldman will continue to be wrong about gold prices and stock market prices as they have been thus far in 2016.

Commentators persist in calling for rallies in stocks and remain dismissive about the gold price. They are still facing in completely the wrong direction, or at least in public.

For the trend now in financial markets is clearly for a bear market in stocks, considerable turmoil in global bond and currency markets and a return to money printing by the global central banks as they try to flood collapsing markets with liquidity.

Such money printing will eventually produce the inflation necessary to reduce the huge debt burdens now depressing the global economy but it will take time to work through the system and in the meantime there will be a final spike in the millennial bull market in gold and silver.

Opportunity knocks

At what point the market sees this opportunity and seizes it is impossible to predict which is why the buy-and-hold school of precious metal investors will be right in the end. But it will be the rush to exit equity markets that marks the start of this final stage in this epic commodity cycle for precious metals.

Judging by the worried faces of stock market professionals since the start of 2016 the goldbugs do not have much longer to wait. Just have a peak back at how gold prices have moved up since the New Year.

Peter Cooper has been a senior business and financial journalist for 20 years. Since selling his dot-com news website before the global financial crisis, he's been a gold and silver investor. Cooper studied politics, philosophy, and economics at Trinity College, Oxford University. He received the designation of Financial Journalist of the Year in the UK some 25 years ago for his scoop on the privatization of Russian real estate, the largest privatization of public property in history. You can reach Peter at [email protected].