We are weeks if not months into various shutdowns in the United States due to the novel coronavirus. The government has already taken many moves to try to soften the economic impact of the stay at home orders, layoffs and other effects caused by attempting to slow the spread of the virus.
Interest rates have been slashed back down to zero. States who have made irresponsible choices on pensions and spending are requesting bailouts. Unemployment is spiking. Stimulus measures are being passed.
The US Economy is based on consumption and debt. Over the long term an economy can’t survive based on consumption and debt. Long term prosperity is based on producing more than you consume. The US consumes more than it produces and makes up the difference with debt. But this article isn’t intended to address that. Taken at face value, the US Economy is based on debt.
With the majority of US states in some type of lockdown. People can’t go out and spend money. Just a few of the impacts: travel, collegian and professional sports, going out to bars, dine-in restaurants, movie theaters, and amusement parks.
People can still shop online to consume and restaurants can serve via takeout and delivery. But the fact is there are major disruptions to the supply chain and people staying home are going to be spending less.
When I look at the markets. They seem to believe that either the stimulus will make up for any disruptions and/or the worst is behind us. The S&P 500 for example, fell over 35% from the peak, but has rallied back and is down just over 14% from the February 19 high of 311.59.
I do think the US government backed by the Fed will print and spend and stimulate the economy as much as they can. But the Fed can’t print masks, toilet paper, food, or goods and services.
The inevitable result will be price inflation and shortages. I don’t want to be doom and gloom. While there are real risks there is no need to panic over COVID-19. People have an amazing ability to adapt and unencumbered entrepreneurs are incredible at generating wealth and increasing standards of living for everyone.
However, there are real challenges and owning alternative assets like gold and silver could be a great way to protect wealth.
I also read a great article that compares the stagflationary episodes in past decades and what investments did well then. It isn’t a quick read but provides detailed and valuable information about What a Secular Bear Market in the 2020s Could Look Like.
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.
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.
“It’s tough to make predictions, especially about the future.” – Yogi Berra
I must say I’m pleasantly surprised. Over a month ago I wrote how gold was entering the monkey-hammer zone. This zone was the price level of $1,350-$1,360, where over the past five years, whenever gold gets to around that range, it gets beaten back down.
Not so in June of 2019. Gold has punched through the monkey-hammer zone and made a new multi-year high of over $1,440. In fact gold hasn’t traded that high since May of 2013.
I had written the following: “I would be pleasantly surprised if gold could breech $1,360 and remain there or higher but if not I think it’s likely to drop down to the $1,230-$1,240 range.”
Turns out the external catalysts gold needed to punch through the monkey-hammer zone was potential war with Iran, trade war with China and the end of the US Federal Reserve’s tightening cycle and the European Central Bank cutting interest rates.
Gold traverses the monkey-hammer zone and new support level of $1,384 forming
The US Federal Reserve
The US Fed has strongly suggested they will cut rates in July.
The fact that the US Federal Reserve is cutting rates with low unemployment and all time highs in stocks is an indicator that gold could go much, much higher.
There isn’t much room to cut rates before hitting 0, and effective interest rates are already near zero if you simply look at the government statistics. The fed-funds rate is 2.25-2.50% and the official CPI as of July being 1.6% means the effective interest rate is just 0.65%-0.9%.
This is simply using the government numbers.
I think the actual rate of inflation is higher than 1.6%. The largest expense I have is rent. I renewed my lease this month and it was 3.5% higher.
Let’s say the rate of price inflation is actually 2.5%. Rates are already effectively zero or even slightly negative.
If the Fed is cutting rates now, when things are good, what are they going to do if things go bad?
The narrative since 2009, with record low interest rates, has been buy stocks. However, price inflation, at least as the government measures it, has been contained. If inflation were to really take off, gold should do well.
I also think stocks could continue to do well in this environment. I think it is possible that stocks keep going up as the more people lose confidence in the dollar. However, if there is a scenario in which gold will really shine, it is in an stagflationary environment the Fed has been creating for the past decade.
Gold in 2019
I didn’t know when gold was going to break out, I just knew it would eventually because of the weak fundamentals of the fiat and debt based global economy.
I actually thought gold would get monkey-hammered back down this go-around, just like is has the past half dozen or so times before over the last five years.
As I’ve stated before, I believe the gold market bottomed in December of 2015 at a price of $1,045. It has been consolidating over the past four years and now, with this breakout above $1,400, could be starting a new and stronger leg of the bull market that began in late 2015.
Of course external catalysts such as a full on war with Iran could cause gold to move higher quickly.
You have to go back pretty far to find any level of price resistance. Around where gold is trading $1,420-$1,430 is one level of potential resistance, the other being around the mid-$1,500s.
Gold is a bellwether for the health and safety of the financial system. When gold is rising in price, it indicates investor’s lack of confidence in fiat currency and the stocks, bonds and other securities priced in said fiat currency.
Gold Price Monkey-Hammering
Over the past five years whenever gold trades up to the $1,350-$1,380 range it gets monkey-hammered back down.
Today the price of gold reentered the monkey-hammer zone. I would be pleasantly surprised if gold could breech $1,360 and remain there or higher but if not I think it’s likely to drop down to the $1,230-$1,240 range.
The gold-bug optimist would argue the 8 day winning streak gold has, combined with the prospect of future rate cuts and tariff uncertainty are bullish for gold.
However, if the past 8 years are any indication, rate cuts plus a lack of measured price inflation means buy stocks.
We can see from the chart above that over the past three years there are not a lot of sellers relative to buyers at the $1,050-$1,200 range and that range is trending higher. There still aren’t a lot of buyers when gold gets up to around $1,350-$1,360 and the price drops as a result.
So while the resistance level is falling somewhat, the support level is rising.
I account for the support level rising thusly: gold has performed so poorly relative to stocks for the past 8 years that anyone who was going to sell gold has already sold it and the majority of those that remain are not going to sell.
Furthermore, anyone buying physical gold at this point is planning on holding it for the long term. However, not many investors are adding to their gold holdings, since gold has performed so poorly. The result is gold is fairly rangebound even while the lower bound is rising.
In other words, most all of the weak buyers have been shaken out and only ardent gold bugs remain. The price rises and drops between 1375 and and lows are speculators, short term trend followers and weaker hands.
The Gold Market in 2019 and Beyond
I don’t know, particularly in the short to medium term if gold is going to go up down or sideways. The July 2018 selloff definitely did a fair bit of technical damage and broke down the ascending triangle pattern I had previously written about.
I’m still operating with the belief that gold bottomed in late 2015 and we won’t see $1,045 again. I don’t know what it would take for gold to break out above $1,400 or when that will happen.
If past price action is any indication of future price behavior gold will likely continue to slog along as it has since the December 2015 low until some external catalyst allows it to traverse the monkey-hammer zone and get to $1,400. In the meantime the fiat-bugs continue to win.
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