The stock market has boomed following the US election. The Dow Jones has shot up over 2,000 points since November, while the ASX gained 500 points over the same period. But it doesn’t mean things will stay that way.
Financial markets are complex by nature.
You can’t just hope for the best and follow the trend. That may have worked 20 years ago; but times have changed. More punters are trading financial markets, and computers have revolutionised global stock exchanges.
However, most investors plod on as if nothing has changed.
The majority believe the trend in motion should stay in motion. In that case, most people jump on the ‘bullish’ bandwagon near the top and sell their shares on the first sign of weakness. And when an asset class crashes and burns, people tend to avoid investing in that asset class. That is, until everyone else starts making money.
Letting yourself get ‘sucked into’ the story and buying stocks based on your emotions is the quickest way to go broke.
Looking at stocks today, we can’t recommend loading up. As I detailed over the past couple of weeks, the stock market is gearing up for a 10–15% correction. That includes the Aussie stock market. At the moment, however, we’re witnessing a technical re-test of the major high on the US Dow Jones Industrial Index.
When, as I expect, stocks start pulling back in the weeks ahead, gold should rally sharply. In other words, get ready for US$1,260 per ounce gold. If you back the right gold miners, you could make a small fortune.
The truth behind the greenback and gold revealed
The Australian Financial Review reported on Monday:
‘The price of gold surged 2.1 per cent last week to its highest point since November 17, as the US dollar weakened and the Federal Reserve kept interest rates on hold.
‘The US central bank gave no clear indication on the likelihood of a March interest rate increase in its latest statement, prompting the US dollar to slide.
‘A weaker greenback makes dollar-dominated commodities such as gold more affordable for investors who hold other currencies.
‘The rapid onslaught of US President Donald Trump’s anti-immigration policies, brash comments about currency manipulation and a protectionist trade stance also boosted demand for gold, considered a safe-haven asset.’
The US dollar pullback has pushed gold higher, that much is clear. However, the above thesis isn’t entirely true. Trump’s anti-immigration policies have nothing to do with the gold price.
Gold started rising into Trump’s inauguration on 20 January. Resource Speculator readers were expecting gold to rally and stocks to fall back, as warned at the start of the year. As the world geared up for a new US president, capital flowed into other currencies. An aura of uncertainty was building around Trump’s policies.
While the inauguration triggered the gold rally, ironically, Donald Trump’s comments pushed it along.
Trump believes that almost every country is manipulating their currency lower.
He’s unofficially labelled China a ‘currency manipulator’. He believes their manipulation has sent the US dollar higher. And, while that’s well off the mark, punters have bought into the narrative.
Trump’s team expanded the currency manipulation accusation to include the rest of the world last week. A top trade advisor, Peter Navarro, accused Germany of using a ‘grossly undervalued’ euro to ‘exploit the US and its EU partners’ according to the Financial Times.
Fact check…that’s not true either.
The euro is a horribly flawed currency. Unlike the US dollar, the euro isn’t backed by a consolidated debt structure at the federal level. To be politically correct, the Eurozone-nation banks own a bit of each other’s sovereign debt. If one major bank goes under (which should happen in the years ahead), it would probably see the entire system collapse. The euro would plummet under that scenario.
The recent euro selloff tells me I’m not the only one who sees this coming.
Trump is a smart businessman, but he doesn’t appear to understand the world economy. Whenever he labels a country a ‘currency manipulator’ or says the greenback is ‘overvalued, trading algorithms go into hyperdrive, selling every news headline.
Trump’s words may have caused the US dollar selloff. But they can’t stop the major trend from playing out.
Understanding the trend in motion
The US dollar bull market is in full swing, folks. We’re facing a major currency crisis in the years ahead. When it happens, the US dollar will skyrocket — it’s the global reserve currency. In other words, while it may be a terribly flawed currency in the long term, there’s no better option available for institutions to park money during a crisis. The US dollar should see the majority of capital inflows, like every financial crisis since the First World War.
With the big picture in mind for the US dollar, you should expect corrections along the way. The greenback is experiencing a slight correction now. And, while it continues to sell off in the weeks ahead (with the stock market), the gold price should rally. Take a look at the correlation for yourself:
[Click to enlarge]
There’s been an inverse correlation between the gold price and the US dollar since the start of the year. The gold price is shown by the white line on the top chart and the green shading on the bottom. The US dollar is shown by the orange line on the top chart and the red shading on the bottom chart.
Looking at the story today, stocks could be preparing for a 10–15% correction. If capital keeps flowing into gold, it could rally towards the US$1,260 per ounce resistance level — at the very least — before the move is finished.
The key take-away: Gold is likely to do the mirror opposite of stocks.
Editor, Markets and Money
PS: If you’re looking for something other than gold stocks, how about lithium? I tipped the best looking lithium stock on the ASX in Resource Speculator last week. Incredibly, the market doesn’t understand this story. It could hit the lithium mother lode in the weeks ahead, right up the road from Tesla Motors Inc. [NASDAQ:TSLA] — an emerging electric-vehicles manufacturer desperate for lithium. For more information, check out Resource Speculator here.