With several states considering reopening in May, at least in some capacity this trend will certainly be disrupted and the rate of active case growth will probably rise again.
Not surprisingly, the major US indices bottomed a few days later on 23 March.
Year to Date, the S&P 500 (black) is down 12.6%, Nasdaq (blue) is down 5.52%, Dow Jones (purple) is down 16.96% and gold (yellow) is up 11.16%
A popular theory is that this rapid selloff and equally rapid rebound is a V-shaped recovery.
As of writing the Vanguard S&P 500 VOO ETF fell over 35% from 311.59 down to 200.55 before rallying back 30% up to 261.2
While this certainly is the case right now, I believe that the fallout from COVID-19 will continue for many months and US stocks will make new lows. We’ll see which organizations and governments have been swimming naked as the tide is going out and the results will probably be ugly.
Since early 2009 US markets have been in a bull market. In less than a month that 11 year bull market has ended and we are now officially in a bear market. The big three US indices are all down more than 20%.
NASDAQ in blue, S&P 500 in Grey, Dow Jones Industrial Average in Purple and Gold in Yellow
Interesting that the trigger to the selloff was something no one was expecting. But perhaps the fact that no one saw this specific catalyst coming shouldn’t come as a surprise.
As I mentioned before, making financial decisions out of fear or panic will rarely result in the best outcome. Cool heads will prevail.
At this point in time I have more questions than answers, but in the midst of this bear market there is great opportunity.
Is Now the Time to be “Greedy”?
“Be fearful when others are greedy and greedy when others are fearful.” – Warren Buffett
It’s hard for me to respect Warren Buffett when the man does everything in his power to avoid paying taxes while at the same time publicly saying he should pay higher taxes. It is hypocritical.
Despite my misgivings about Mr. Buffett I can’t argue with the long term performance of Berkshire Hathaway.
It’s important to ignore what Warren Buffet says on his virtue signaling tours and look at what he is actually doing with his money.
Others are fearful right now so it could be a good time to be “greedy”. Of course buying things on sale isn’t actual greed but I digress.
Who Knows when the markets will bottom out?
I’ve been underweight US stocks and will be using this bear market as an opportunity to dollar cost average into US index funds and ETFs. I do not believe it is possible to time the bottom so I’m not going to try. What I am trying to do is to buy into the market at an interval of good prices.
Compared to the highs stocks are on sale at a 25% discount. They might go on sale for 40% off or even 50% off but in either case it is a significant discount from the mid-February highs.
How is Gold Working Out?
Gold has been a decent hedge so far. However during a panic the yellow metal will probably fall as people sell everything. And indeed gold is down from the $1,700 high made earlier this month.
For the first five years after the last financial shock (2008-2009) US stocks were the place to be and gold, which had a tremendous run-up, went into a bear market. Of course past performance is no guarantee of future performance, but it can provide a guide for how markets could possibly perform.
Gold in Yellow and S&P 500 in Blue
Over the past five years, as a result the current crash, gold has outperformed the S&P 500. Gold is up 32.71% compared to the S&P 500 being up 24.06%.
Gold in Yellow and S&P 500 in Blue
However, even after this large drop. Since the 2008-2009 financial crisis, stocks have been the place to be. The S&P 500 is still up 248% since February of 2009, while gold is up relatively modest 68.9%.
Gold in Yellow and S&P 500 in Blue
And despite this large drop, for the past 10 years, stocks have done very well.
NASDAQ in blue, S&P 500 in Grey, Dow Jones Industrial Average in Purple and Gold in Yellow
The Fed Tries to “Help”
Not one to stand by and allow the free market to operate–the US Federal Reserve announced more quantitative easing (QE4) on Thursday. Of course if you count the not-QE QE, this would be QE5, for those keeping score at home. It is also anticipated that rates will be cut again.
Rates were over 6.5% prior to the 2000 dot com crash. They were hiked back up to about 5.25% prior to the 2008-2009 financial crisis. But after the 11 year bull run rates only made it as high as 2.4%.
In short the rates have never been this low going into what could be a recession.
The Fed is entering this bear market (and potential recession) with interest rates already so low they have little ammunition to “help”.
The Fed is already doing more Quantitative Easing.It seems inevitable that rates will go negative.
Gold reclaimed the $1,500 level just a couple months ago over Christmas. Now the yellow metal has topped $1,600 and is trading north of $1,610. Gold also reached this level earlier this year on January 8. However, long term Gold has not been at this level since March of 2013.
With a US stock market that is 11 years in a bull market, profligate government spending, artificially low interest rates and geopolitical uncertainty in Iran and China, gold will likely remain a safe haven place to park capital.
However, for those over allocated gold, this is also an opportunity for some profit taking.
In time for Christmas gold has moved up above $1,500 and as of writing is trading north of $1,510.
I had previously written about how gold has been on the receiving end of a severe price drubbing. Not so now.
The fundamentals of gold are very strong. Gold was is a downward channel and this strong move upward could be a continuation of the gold bull market that began at the end of 2015/early 2016.
The $1,450 level looks like strong support. Gold would need to break through the $1,520 and $1,545 levels to retest the six year high set 4 September of $1,566.
In what I describe as an anti-Black Friday sale, Goldmoney announced on the 29th of November a new $10 per month minimum storage fee.
This goes into effect on 1 January 2020.
Goldmoney (formerly BitGold) already had storage fees, but they were proportional. Now, smaller accounts might not make financial sense anymore.
I’ve determined that Goldmoney doesn’t make sense for me anymore.
Goldmoney Fees are Too Darn High
It is always important to understand the fees a financial services company charges, and Goldmoney has plenty. There is a 0.5% gold buy/sell fee and a $20 wire transfer fee for withdrawals (funding can be free with EFT).
Storage fees vary by location and the lowest cost locations are .01% per month (London, Hong Kong, Zurich, Singapore).
However, this new a $10 per month minimum fee is a killer. In order to pay just .01% per month, you’d need to have at least $100,000 in gold stored.
As a simple example, $10 per month fee on $120 worth of stored gold would be equal to the value of the gold stored after just one year.
Some other considerations, which in my view don’t help enough, are that Goldmoney does offset the minimum fee with commissions paid and the accounts are insured.
However, your homeowners insurance or renters insurance might cover your safe deposit box as well.
If you have a larger account, insurance is important to you, or conduct a lot of transactions, Goldmoney might make sense.
Goldmoney Doesn’t Make Sense for Smaller Accounts
I was previously an advocate of this low cost way to store physical precious metals around the world. With this new development in fees I have decided to withdraw my endorsement of Goldmoney.
Because of the smaller amount of Gold I have with Goldmoney, I’ve elected to sell all my gold in their custody. At this time I have no intention of doing business with Goldmoney again.
The insurance is an important consideration, however, a safety deposit box or other secure location is going to be much more cost effective for the small investor.
The S&P 500 made fresh and new all time highs Friday. Bonds were down, the dollar index was modestly higher and gold was on the receiving end of a severe drubbing.
On the day the S&P 500 was up 0.33%, the dollar index was up 0.26%, 10-year treasury down 0.36% and gold bring up the rear down 0.62%
On the year gold is still up over 13%. But the over the course of the fall the S&P 500 has surpassed gold’s performance and is up 23%.
Gold has fallen over $100 from the 4 September highs
Looking back: 2019 Gold
In June of 2019 Gold finally managed to break out of the monkey-hammer zone of the $1350s, consolidated between $1400 and $1450, made a second breakout and with a great run up as high as $1566.
However, starting in September, gold has been trending down again and has been drubbed down to the mid $1450s.
I think this is a temporary setback for the price of gold and a buying opportunity for someone who is under-allocated in gold.
2016 was indeed the start of a new gold bull market after gold bottomed out in December of 2015.
Finishing 2019 and Beyond
The price of gold ebbs and flows a great deal with news and sentiment. Right now the market seems to believe 1) the Fed is done easing and 2) the trade war is close to a peaceful resolution.
Certainly the Fed is not done easing as the balance sheet continues to grow. There are also certain core issues in which Trump and China are both unwilling to compromise on.
A limited trade deal is certainly possible, but I doubt China is going to relent on certain core demands the US is making.
To me the chart looks bearish in the short term. Some potential places gold can find support would be where it is currently trading, at around $1450. Below that perhaps $1400.
If traders become very optimistic about the stock market, could even go down to $1380 or retest the monkey-hammer zone in the $1360s.
Of course it is only my educated guess but I think gold will find support somewhere between $1400 and $1450.
While the recent price action looks rather bearish over the next 3-6 months I think gold will reach $1600 in 2020.
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