Goldman Sachs expects gold to 'outperform' amid growing fears of a stock market correction

It would have been nice if they had given this warning to investors BEFORE the stock market correction.

https://www.cnbc.com/2018/03/26/goldman-sachs-expects-gold-to-outperform-amid-growing-fears-of-a-stock-market-correction.html

The Lengthy 10 Month Correction In Gold Is Over

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/7/6_Hathaway_-_The_Lengthy_10_Month_Correction_In_Gold_Is_Over.html

Is a correction coming?

Shorts have been torched since the March lows, betting on a market correction as traders climb the wall of worry, waiting for the next shoe to drop. The problem is the Fed has flooded the market with liquidity, lending to banks at zero interest rates, encouraging the carry trade as these banks invest in equities, bonds, and commodities. Hence, the elevation in these assets, despite a lousy economy.

In essence, a cheapened dollar is bullish for other asset vehicles. The Fed, and now the G-20 countries, have declared easy money policies will be extended to at least mid-2010, when they may take the punch bowl away.

Having said that, I expect a correction in both equities and gold soon, albeit temporary, as the short dollar trade is getting really crowded. When a a consensus builds, it's usually prudent to take the opposing side--at least until sentiment becomes less lopsided. Additionally, as the dollar keeps getting trashed, foreign governments are becoming increasingly concerned at their stronger currencies vis-a-vis the dollar, making their exporting industries less competitive (although their consumers enjoy the weak dollar when they travel as tourists to the US).

So I believe their central banks will intervene in unison in buying dollars and selling their own currencies. It'll be a death race to the bottom---to see which countries can devalue their currencies the most, in order to stimulate their own domestic economies.

This (temporary) strength in the dollar will tank gold, commodities and stocks, in my opinion. This is what happened in Quarter 4 2008, although the dip won't be as pronounced this time around, as there are many more buyers to stem the decline, including big hedge funds and foreign central banks. The bullion shorts have more formidable opponents with deeper pockets now.

Obviously, President Obama, the Fed and US Treasury don't want a repeat of 2008, so they will keep printing dollars. After the correction, the dollar will resume its downward trajectory. The only question is WHEN this correction will occur.

I'm not selling everything, especially if I'm waiting for a biotech event, but I sold a small portion of my gold positions today. I will look to add to my gold position on any pullback. If it doesn't occur, I won't beat myself up. It's been a good run with the yellow and white metals already, up triple digits in the mining stocks. But when I see Bank of America forecasting $1500/ounce gold, and mainstream pundits predicting $3,000 gold, I get nervous.

Where were these analysts last year when gold was $675, and some of these mining shares were penny stocks? The answer was they were still in the major equities indices--and subsequently got hammered in the financial meltdown.

I'm not selling all my current positions in gold, because 5 years from now--or less, we could see $2500 gold. Trading in and out of positions is seldom rewarding. I'm just taking profits, only because I can, without running for the exits.

It's similar to when I sold some BCRX at $6.70 price per share (pps), after buying in the $2's and $3's after the initial swine flu outbreak earlier this summer. Do I regret it now that it's at $11? Yes, but after being honest about it, it was the right thing to do. I won't get rich on this one trade, but I'll be around to play another day. I still have house money on the table, and even added a little today on the dip, so I'm still in the game.

I'm not trying to optimize my returns--I'm trying to play the probabilities, and hedge my longs. Since the short dollar / long gold trade is too crowded, I'm stepping back from the cliff, but I'm not leaving the beach.

See disclaimers on the sidebar. Do your own due diligence. These are not specific recommendations on assets or positions. Good luck.

Disclosure: I am long gold and silver mining stocks, and long BCRX shares. But obviously, I am expecting pullbacks in both asset classes.

Gold chart

http://www.the-privateer.com/chart/gold-pf.html

The chart for gold still looks bullish, with support at $975, and $875, should $975 not hold. In other words, the long-term bullish trend is in place unless support levels are broken. Either way, expect violent corrections, as the commercial shorts vigorously attempt to put a lid on prices.

The short USDollar / long precious metals trade is getting crowded, so corrections won't be unexpected.

Disclaimer: this chart only depicts previous price levels, and does not indicate future performance. Investing is risky, so consult with your professional investment advisor. Do your own due diligence.

Disclosure: I am long physical gold and silver, and long gold and silver mining shares.

So much for the correction in gold

Over the weekend, I foreccasted gold would correct below $1000 after peaking around $1020 last week. My rationale was twofold and the usual:
1) the commercial bullion banks increased their short positions to all-time highs. Undoubtedly, many were naked shorts with no physical gold backing them.
2) the long gold trade was getting crowded with gold surpassing the psychologically important $1000/oz. threshold.

The only question was how low gold would correct to. Based on previous dips, the charts favored a move back down to $950. The caveat was that too much buying pressure from China and other Asian countries, as well as nervous investors worldwide would prop up any declines.

Sure enough, gold briefly corrected below $1000, and sure enough rebounded this morning in New York's COMEX. Tonite, in Asian trading, gold is surging up $10, testing the $1020 highs.

This signals a change in the gold and silver marketplace, in my opinion. Not only has sentiment changed to a bullish tone for precious metals, but the corrections and rallies have also taken on different dynamics. Violent price declines spurred on by the commercial shorts are met with equally violent upswings. There are no steady climbs. Each decline has triggered a vigorous upward response.

Precious metals markets have always been volatile, and the recent volatility isn't necessarily greater, but the longs seem to be responding quicker, meaning big funds are behind the powerful rallies, not just retail gold bugs. The long positions now have juice behind them. The Goliath bullion banks now have a more powerful foe on the other side of the trade--they can no longer whipsaw the star-crossed retail gold investors. The counterparty longs are now hedge funds and sovereign funds with deep pockets. The stakes in this tug-of-war just got a lot more interesting.

Gold chart

http://www.the-privateer.com/chart/gold-pf.html

This point and figure chart shows support at $950/oz., with the next level of support at $850/oz, should the price of gold correct below $950. Expect retracement higher if we get a test of these support levels.

However, should we consolidate for a few weeks at current levels, expect another move higher, with little resistance, as we are in uncharted all-time highs, at least in terms of a a weakened dollar.

In fact, gold is inversely correlated to the US Dollar. As long as market complacency continues (as measured by a low Volatility Index), equities will continue to rise as investors are willing to take on more risk. This would be bearish for US Treasury bonds--and the US Dollar, which would be bullish for gold. However, if the VIX rises, money will flow back to the dollar as a safety haven, and that will precipitate gold's decline.

That correction in gold may be a good entry point for gold bugs, or for accumulation of more gold mining shares.

Disclosure: I am long gold mining shares.

Devil's Advocate

I visited a former colleague yesterday, and presented the weak dollar/strong commodities thesis to him, with some agreement. As many of you know, this huge rally has been great for our account values, but it has made me increasingly nervous. I've asked for counterarguments against these plays, and was looking to poll some of you in our email threads last night. After a long day, I was too tired to post, so I will do so today:

1) Despite success in our holdings so far, what could derail the current rallies in commodities? Hubris is not a virtue when markets turn south.

2) Are our pivot event-driven microcap biotech stocks immune to an overall market downturn, or are we merely decline-resistant?

Well, today's actions confirms my suspicions--even if precious metals are a hedge against inflation (as are other hard assets), when the market tanks, it takes almost every sector with it (unless you are short the indices). If individuals, hedge funds and in hard times--institutional investors have to raise cash, they will sell any asset class, whether it's a gold ETF, REIT, or just regular old equities.

Having said that, nothing goes straight up (I know I have been redundant here), and corrections are healthy. The pertinent question is this a correction, or the start of another demand destruction decline?

On equities, I'm still of the opinion that we have been blessed with a strong rally since March 6, enclosed within a secular bear market. I still see too much debt within the consumer, corporations, real estate, as well as public sectors. Foreclosures and unemployment are rising, this time infecting borrowers with good credit, not just sub-prime borrowers. Commercial real estate defaults are exploding. And with 70% of our nation's GDP consumer-based, all these entities are in the de-levering mode--of course, with the exception of our nation's exploding balance sheet. And if consumers and businesses aren't opening their wallets, every attempt by the economy to recover will fail.

So where does that leave commodities? I suspect a bifurcation between commodity prices and equities overall. Even tho the world will consume less energy due to industrial and consumer demand destruction, inflation is still the boogey-man, mainly because the US Treasury has printed too many dollars. The pivot point is when those dollars start circulating through the economy, creating a multiplier effect. Currently, banks are hoarding dollars in order to recapitalize their toxic balance sheets. When and if commercial bank lending resumes, the Fed will be powerless to turn off the spigot, igniting inflation. It will be too little, too late. It is political suicide to raise interest rates and reign in money supply while citizens are losing jobs and their homes.

Will I be proven right? Nobody knows, but so far, the market agrees with me, as history has shown with 100% accuracy central banks are always late in closing the discount window. And with the economy on such shaky ground, I predict they will be late again in tightening monetary policy.

Conclusions? Commodities remain in a secular bull market--one that started in 2001, and one that corrected immensely in 2008, due to the financial crisis. In other words, we will experience a correction, and gold may correct 10% perhaps. But eventually, inflation will take root, as central banks worldwide attempt to stimulate their respective economies. Besides, inflation reduces the debt burden. In a perverse situation, central banks now want to INDUCE inflation, instead of trying to manage it. And as long as the Fed is intent on trillion dollar deficits, the US Treasury will continue to issue trillions of dollars of paper. Savers will be destroyed, and debtors rewarded. With the US government the biggest debtor in the world, guess who benefits from inflation?

As for the stock market, this bear market rally will also experience corrections, and could even go higher with the S&P 500 touching 1100. But don't count on us reaching our all-time highs. I don't see that in the cards, and if we do, it would be the short of our lifetime.

Having said that, I would appreciate counter-arguments. Sometimes losing money is more instructive, and despite our recent gains, my anxiety level is heightened. I even sold some of my winners earlier this week, and bought a few SPY puts last week. Turns out I may have been early with the puts, but better early than late.

Reflation play intact

Oil, natural gas, commodities, copper, and 30-year T-bond yields are all up big, so I took some profits off the table. Long-term treasury bonds are looking really shaky, so the TBT trade was profitable. I'm hoping we get a correction--even if it means I lose some money, because if we don't, whatever recovery we hope to have will be toast. Having said that, most of the reflation trade is still in play, despite any looming correction, as the long-term trend is high inflation--despite the government's efforts to downplay it. If there's only one thing to learn from this financial crisis, it's not to trust central bankers. The last 2 years should have cleared any doubts.

The Chinese are shunning T-bonds as I predicted, and opting for gold, base metals, energy and commodities as they rebuild their domestic and export economy. Expect the yield curve to steepen long-term, as it has since December.

The S & P 500 at 920 and Dow Jones Industrials look heavy here, after a big 30% run up. The fundamentals of our economy are still terrible--rising consumer debt defaults, rising jumbo loan mortgage foreclosures, rising commercial real estate defaults, and toxic assets being shoved under the rug with sketchy accounting. A steep yield curve will help banks earning operating profits with widened net interest margins, but the big money centers still are left holding the bag of toxic assets in their basement. I re-entered puts in a certain for-profit educator, and I think all the indices will correct here. This bear market rally has been powerful, but the market's only function is to take down as many suckers as possible. Too many retail investors are just now joining the bandwagon, and I suspect the majority of the move is now behind us. Let's hope the coming correction isn't a whopper.

I'm not a good trader, altho I'm gettng better at valuation, so please do your own due diligence, and good luck to all.

Gold--due for a pause--or ready to explode again?

I questioned whether gold was due for a pause a couple days ago, as the price of gold kept spiking up, breaking resistance levels. Well, the price shot up again overnight in Asia, BUT the mining shares didn't move much this morning. So I hedged this morning, not selling my positions, instead buying a couple puts, which will profit should ABX correct. Think of it as a cheap form of insurance in case gold pauses--without having to trigger a taxable event from profit-taking.

The price of the mining shares usually lead the actual price of the underlying commodity. In other words, it's gone up too fast and is looking heavy. There's that Physics training kicking in again...:-)

Having said that, I'm still bullish on gold medium- and long-term, as the fundamentals are unimpaired, to borrow a quote from Jim Rogers. But gold mining shares do look a bit tired at these levels. More conservative investors may want to take some profits off the table--a 100% profit in two months is nothing to sneeze at.

Gold due for a pause?

For those who missed the run up in gold from November lows, you still have time, but now is not the time to commit new money, or even add to existing long gold positions. Technically, gold is still in a secular bull market that started as far back as 2001, but like any asset, prices don't move up or down in a straight line. Last week's up move in gold was breath-taking, so it's due for a pause or a correction at these levels. That's actually healthy, as it builds a stronger demand base (buyers) without the inherent froth of manias (we will experience that later when the general public drives up prices in a buying panic).

If anything, a correction is welcome, as it enables a lower entry point for long positions later on. Once the charts and the Moving Average Convergence Divergence (MACD) turns positive again, it will re-confirm our bullish posture. Until then, keep your powder dry and wait for that next opportunity.

GLD Price Chart and MACD Indicator