Are you nervous about the Dow nudging new highs?
Well, you should be; or, at least, you should be thinking: Where to from here? Higher or lower?
Based on the cyclically-adjusted price-to-earnings (CAPE 10 — devised by Warren Buffet’s mentor, Benjamin Graham) ratio, the US market is now on the podium as one of the most overvalued markets in history. The gold and silver medals in this infamous contest go to the dotcom boom and the 1929 market high. The current market may go higher and knock the 1929 high out of silver position, but that’s not an event worth cheering…because we all know what happened next.
While share investors — seemingly oblivious to what comes next — cheer the market’s bronze medal performance, investors in real gold are having their faith in the precious metal severely tested.
Gold soared on the night of Trump’s election, and has fallen like a stone since.
We’re told inflation fears are behind the bond yields rising, but, if that’s the case, why is the asset that’s meant to be a hedge against inflation falling?
One of the reasons being given is that gold has no yield, and, with rates moving higher, bonds are more attractive.
But that doesn’t make sense to me. When the gold price hit an all-time high of US$1,900 an ounce in August 2011, the US 10-year bond rate was around 3.5%…a good one percent higher than today.
Back then, the primary driver behind the gold price was a concern that central banking stimulus would create inflation.
Today, markets are equally concerned that Trump’s proposed spend-a-thon will finally release the inflation genie. Yet, gold languishes…
Could it be other factors?
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There’s speculation that Beijing, in a bid to stem the capital outflow from China, has placed a restriction on the number of bullion import licences.
India’s decision to shred the 500 and 1,000-rupee notes is also being blamed as a contributor to the slump in the gold price. Apparently, these two notes account for 86% of all currency in circulation in India. The removal of the notes has reportedly dried up demand to buy gold.
Everyone is speculating as to why gold is doing the opposite of what everyone thought it would.
As they say, ‘When everyone is thinking the same, no one is thinking at all.’
On 29 November, Bloomberg ran the following headline:
[Click to enlarge]
Published just days ago, the article stated:
‘The worst is yet to come. At least that’s the opinion of the top two gold forecasters who say bullion will suffer further losses in 2017 as interest rates climb and the dollar strengthens.
‘Gold is set for its worst month in more than three years, with investors dumping bullion at the fastest pace since 2013. Assets in bullion-backed exchange-traded funds have shrunk 5.3 percent in November, the biggest monthly drop since June of that year.’
It certainly doesn’t look good for gold.
Or does it?
‘…with investors dumping bullion at the fastest pace since 2013.’
According to the article, the current selloff eclipses that of June 2013.
If we go back 12 months, there was this headline from Bloomberg on 15 November 2015:
[Click to enlarge]
To quote the article: ‘Investors are back to dumping precious metals as gold trades near five-year lows and banks including Barclays Plc forecast more price declines.’
Here’s the pattern: Investors dump gold in June 2013, November 2015 and now in November 2016.
The following chart is the gold price (in USD) since January 2012.
[Click to enlarge]
Well, will you look at that.
The gold price fell off the cliff; when? June 2013.
When did investors flee gold? June 2013.
Cast your eyes a little further to the right…yes, towards November 2015.
When was the lowest point for the gold price in the past five years?
You guessed it…November 2015.
When did investors dump the precious metal?
Good guess…November 2015.
The commentary a year ago was that banks were forecasting more price declines.
How did that forecast work out?
The gold price did the opposite. It soared.
The latest ‘expert’ commentary tells us that ‘the worst is yet to come’…‘The top two gold forecasters who say bullion will suffer further losses in 2017.’
Perhaps it’ll be a case of third time lucky (or unlucky, if you are holding gold).
Or, perhaps, the trend will repeat itself, again.
What’s been highlighted here is a classic case of extrapolation…by both the investing public and so-called expert analysts.
What has happened will continue to happen.
Investors panic AFTER the asset has fallen in value.
What’s the bet a good number of these investors piled in when the gold price was pushing through the US$1,700 level, and then sold out around US$1,200?
A textbook case of buying high and selling low.
Lazy analysts then forecast this panicked trend into the future.
This pattern is what I call the ‘rinse and repeat cycle’. It plays out time and time again in all markets.
The herd rushes in, the industry forecasts prices to go higher, the herd rushes out, and the industry forecast prices to go lower. We press the ‘rinse and repeat button’ again, and again, and again.
Here’s my guess: Based on nothing more than being an observer of investor psychology, the gold price will rebound in the coming months.
While I think gold should enjoy a rally from an oversold position, my longer-term view is that gold, in due course, will suffer a far bigger selloff than the one we’ve seen recently.
Investors really do not know the value of an asset; all they know is the price.
There’s a huge difference.
At present, asset prices in markets are being inflated by the twin propulsion of low interest rates and easy access to credit. When, not if, both of these factors are put in reverse, we’ll see true value emerge.
Interest rates will rise when the bond market starts to price in the risk of default from sovereign and corporate creditors. You are not reading about it in the mainstream, but research sources whose opinions I value highly are of the view that the US is teetering on the edge of a recession; all you need is a slowdown in the US economy to set the default dominoes in motion. It’s coming.
It’s famously said that banks will lend you an umbrella when the sun’s shining and take it away when it’s raining.
True to form, when the next recession hits, banks will shut up shop and look to foreclose on marginal lenders…the same lenders the banks were happy to throw money at in the good times. Credit is withdrawn.
When rates rise, and credit gets turned off, panicked selling sets in.
Gold, along with all other assets, will be sold off to get the most precious asset there is in times of great financial upheaval…cash.
Households, corporates and governments will want cash to stave off credit default.
As I said, rinse and repeat. It’s an all too familiar pattern.
Moral of the story: Do not run with the herd; the herd gets slaughtered.
Finally, a personal note from me about what’s happening next week…
You may have heard whisperings that something big is brewing here at Port Phillip Publishing. Our first Special Investigation — or foray into investigative journalism.
I can confirm this rumour. Because I have spearheaded the project.
You’ve not heard anything about it from me. Even though it’s been bubbling away in the background for several years now. But, as you will see next week, there’s a good reason for the secrecy.
Over Port Phillip Publishing’s 11 years in Australia, we’ve been able to alert our subscribers to several key upcoming dangers — including the 2008 financial crisis and the wind-down of the mining boom.
If you were convinced by our research that the upcoming danger was real, you had time to prepare. And we told you how to do it.
Next week, we alert you to another danger.
Only this one is different. It’s the basis for a personal, years-long by me and my research team. The result is our first 88-minute Special Investigation, which you’ll be able to watch for free mid next week.
Still can’t say. But all will be revealed soon.
We started by setting out to solve a mystery. We had no idea where it would take us.
But I believe nothing else may have a greater impact on your wealth and wellbeing over the next few years that the conclusion this investigation comes to.
Not the coming superannuation reforms. Not the newly installed US president. Not China. Not even the decisions central bankers make.
That’s all for now. Keep an eye out next week for when the bomb drops…
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