Well, we finally did it. Here we sit at and near record levels for the broad indices. On cue, every talking head and everyday Joe is offering barroom-type prognostications on whether the markets are headed higher or about to drop like flies at a Raid factory.
Not surprisingly, much of the talk and comparisons are centered on 2007, when the INDU and S&P traded to record levels, eclipsing those set during the dot com craze. From there, we all know what occurred – the mother of all bubbles began to burst after having gorged on free money dating back nearly a decade to the late 90s.
So, given that Tom, Dick and Harry have had a go at it, I figure it’s my duty to jump in and set the record straight – tell you where this baby’s really heading so we can all just get on the same page, book our profits and take the rest of the year off.
K, here goes – tapping into the most accurate proprietary system ever created for calling markets. And the answer is……………………… snake eyes…*%&$*%*& …these damn dice are good for nothin…
I’m sorry; I admit I can’t really predict the future…sorta fuzzy on much of the past, truth be known.
Fact is I don’t like predictions so much and I certainly don’t wanna be forced to do something crazy, like…hmmm, I don’t know…say skiing down a mountain in a thong – pink… or any other color, for that matter. Wait, I think that’s been done before…
No, truth is I’m not here to make a prediction. Actually just wanting to plant a quick thought for you to hang on to as we progress over the coming weeks, months, the latter-half of this year and into next. While everyone else is focused on the equity indices trading to new highs, I myself think we’d be well-served to keep an eye out on gold.
Why?
Good question!
As most of you know, gold is much more than a precious metal. Without going into boring detail, fact is it’s the singular tangible storage unit of value recognized and freely exchanged the world over. People see it in many different guises – proxy on the dollar and alternatively on the economy (here in the U.S. and globally), as a hedge against inflation, as an alternative reserve (every treasury in the world has some gold bricks housed within their coffers), yadayadayada… It’s an aspirin for all sorts of economic and monetary ails and woes.
Fascinating stuff! ZZZZZZZZzzzzzzzzz…. Not so much!
What I’m actually inching toward is the fact that gold has provided a fairly decent “tell” on the markets in times past. We need look no further for an example than the current bull market in equities that emerged during what many consider the height of the financial meltdown in early 2009.
Looking back, equities seemed headed into the ground early that year and few were buying into the notion we were gonna experience a V-shape recovery right about the time all looked lost. Back then, Tom, Dick and Harry were all silent, not wanting to be the first out to tell investors all was hunky dory…
But while the “talking class” were conspicuously silent during much of that year, there was in fact a clue out there for those looking – a “tell,” if you would.
Gold actually bottomed in the latter half of 2008 and then began to rally sharply months in advance of the turn in equities. Thereafter, it led equities and most other assets (sans the US dollar, which was taking it in the shorts for all sorts of reasons) on a northern trek. For gold, that run was nothin short of parabolic over the course of three years, during which time it traded from roughly 700 to a record high in September 2011 (intraday) above the 1,920 mark.
So Gold beat everyone else to the top…17-odd months in advance of the broad equity indices in the U.S. Ancient history now, right? So why bother and what possible lesson might we take from this?
Two main points. First is the fact that the metal has been bouncing around in a consolidation zone since setting the record high. Always teasing at another run for the glory, yet seemingly stuck and looking for some catalyst to propel it higher.
Which brings me to the second point. What was the original catalyst for the run in Gold? Ask 100 talking heads and you’ll get thousands of convoluted answers. Ask everyone else and you’ll get the simple truth – free money given out by our Fed and those from most other developed economies of the world.
In mentioning this, I’m not commenting on the merit of such action…just the fact it occurred. Given that Fed officials the world over were broadcasting the fact they’d go to extraordinary measures to save us all from calamity – a defacto backstop – traders understood they could put on a directional bet and basically let it ride with impunity…which they did big time, culminating with the Sept ’11 record.
Why didn’t the rally continue, given the policies that propelled it remain in place still? Again, ask a cadre of talking heads and you’ll get even more convoluted answers as to why Gold backed off and has been consolidating since. Ask everyone else and the answer seems pretty obvious – the parabolic picture on the chart got to looking pretty scary…the ultimate game of “musical chairs,” much like we experienced in equities dating back to the dot com period.
Okay, so what about now? The period of consolidation since that time has certainly changed the complexion on the chart and a run-up from this point would seem sustainable. Yet there remains hesitation and a lack of conviction on the part of gold bugs to embark on a new run…at least for now.
Looking at the chart, it seems clear that traders no longer believe they can trade the long side of Gold with the impunity of the past. Why? The lack of a clear catalyst…e.g. an accommodative environment going forward.
Which brings me back to the “tell,” that gold might provide – might in fact be providing now. Namely, an emerging recognition that the breaks on the gravy train are about to be put to heavy use. As in, the day of reckoning approaching…e.g. higher rates, a hawkish monetary policy and inflation.
Which begs the question – how have equities fared during such periods?
Am I predicting these record levels are unsustainable and we’re about to see the equity market in the U.S. crater? No, not even close. I’m not in the prediction business. I simply trade whatever the market gives me. I’ll leave the predictions to Tom, Dick, Harry and the rest of the talking heads.
Whatever they’re out there saying, you might wanna keep an eye on Gold…just say’n.
Louis Horkan
Editor
Louis entered the biz in the late 80s and spent over a decade working as a trader, instilling him with unique insight into trading and the markets. In 1998 he switched gears to become the group editorial director for a large network of award-winning, trading-focused newsletters. In 2002 he became the founding editor-in-chief for two financial trade magazinesóeach served approx. 40,000 independent financial advisers nationwide. Heís appeared on business TV, in the business press and on numerous biz-focused radio programs in the past. He writes market commentary and analysis most days and trades on a daily basis.