Does Gold Smell A Crisis?
New York (Aug 7) A story in the July 30, 2016 Globe and Mail Report on Business entitled “The Next Financial Crisis” underlined the growing awareness of the financial and economic malaise that is slowly enveloping the globe. In this week’s The Economist (July 30 – August 5, 2016), the headline was “The New Political Divide.”
It is not just financial and economic malaise that is enveloping the world, but there is also a political malaise enveloping the world, especially the Western world, with the rise of populist parties and leaders, often xenophobic and fascist, rarely leftist, accompanied often by increasing violence.
The Globe article went on to center on the travails of the Italian banking system, and the potential for destabilization in the Eurozone’s third-largest economy and the world’s eighth-largest economy. Destabilization in Italy could have negative ramifications for the globe, unlike the collapse in Greece that was ultimately more localized.
The Western world’s central banks are trapped, following years of quantitative easing (QE), ZIRP and NIRP, yet the economies of the EU, Japan, the United Kingdom and the US remain anemic at best. $12-$13 trillion of government debt trades at negative interest rates, a bankrupt policy that is negatively impacting pension funds, insurance companies, and even mutual funds and banks, as it affects their ability to pay retirees.
Numerous pension funds remain grossly underfunded, something that will leave expectant retirees woefully short of what they need in retirement. Rounds of QE, ZIRP and NIRP, and even talk of helicopter money, has helped push up stock and bond prices to new levels.
There has been astounding growth in global debt, especially of late, by corporations trying to push their stock prices higher or acquire other companies, but rarely for productive use. Investors drop their guard on risk by flocking to higher-yielding securities offered by non-financial corporations to obtain income.
Against this backdrop gold has risen over 25% in 2016, the best-performing asset. Does gold “smell” a crisis?
Households Spend More Than They Earn? No!
June personal income rose 0.2%, but June personal spending rose 0.4%. This was the fourth consecutive month of spending exceeding income. Is the US consumer more confident? Consumer credit is rising, albeit slowly, but real income has been declining or stagnant for years.
Consumer sentiment is beginning to wane. Maybe the consumer is just becoming more strapped as, after all, retail sales are faltering, and even auto sales that had led the way are beginning to wane.
Weekly Market Review
Another week, another record high for the S&P 500. But nobody joined the party. Especially not the Dow Jones Transportations (DJT) that is nowhere near its earlier highs, nor even the Dow Jones Industrials (DJI). The NASDAQ was strong, but is still short of its previous high in July 2015.
The bullish percent indices for the S&P 500 and the NASDAQ are beginning to look a bit “iffy.” These are warning signs, but do not mean that the stock indices are about to tumble. August and September are traditionally weak months for the stock markets. Will history hold?
A strong up move over the next three months could almost ensure the incumbent party holds the White House, but a stock market shakedown could suggest a change in the White House. The NASDAQ has been almost straight up since June 2016. A pause is needed.
On the good news side, the TSX Venture Exchange (SPCDNX) remains the best-performing stock market, and once again made new 52-week highs.
Despite announcing a huge new stimulus package, including a fiscal stimulus package, the recent Japanese Government Bond (JGBs) auction went poorly as buyers backed away. The result was a mini-crash as the yield on the 10-year JGBs leaped from negative 0.29% to negative 0.08%. Still negative, but nonetheless a bit of a shock to the system following months of steady declines in the JGBs bond yield.
Is the Brexit rally over? The US Dollar Index took a tumble following the release of the Q2 GDP in the US last Friday. The US$ Index failed at its breakout zone near 98, and by week’s end was just under 95. So is the rally over? Hard to say, but the US$ Index needs to recover, otherwise it could be a test of 94 and a breakdown to test the May lows near 92.
The big winner was the Japanese yen, with the euro and even USD/CAD only slightly higher.
Gold and Precious Metals
The weak US$ Index, coupled with ongoing financial, economic and political instability and turmoil, helped push up gold and silver prices this past week. The gold stocks, led by the Gold Bugs Index (HUI) and the TSX Gold Index (SPTTGD), made new 52-week highs, as did platinum and palladium. But bullish sentiment is at unheard-of levels, suggesting that a correction could be imminent.
The commercial COT remains quite negative. Gold is up over 25% so far in 2016, and a study showed that once gold is up 25% or more in a year odds favor a continuance of the rally, with gains of upwards of 175% off of lows.
Gold is currently just under a significant resistance area at $1,380 to $1,400; it needs to overhaul if there are to be thoughts of $1,500. A breakdown under $1,310 could suggest a retest of $1,240 to $1,260. The conditions for gold have never been better, but grossly high bullish sentiment is calling for a correction.
The BOE announced a 0.25% rate cut, the first since 2009, and a new QE program of £60 billion, yet another sign that the Western central banks are losing control. The British pound dropped sharply on the news.