Buying gold and dumping stocks is a no-brainer this summer
New York (July 8) Last week was a heart-stopper for gold bugs when prices plunged briefly to a seven-month low of $1,238 an ounce before bouncing back to $1,260.
But if this trading pattern seems familiar to summer deck chair investors, then you are quite right. In the same week last year, gold hit rock bottom and then rallied $150 in the next two months. A spike lower is also typical of a market bottom.
Gold has basically been stuck in a sideways trading channel for the past five years. That’s a long time for any asset class to be stuck on the road to nowhere.
Needless to say US stocks have outperformed by a mile. The S&P 500 is up 70 per cent in those years.
It’s not really good enough to blame the strong US dollar this year for gold’s weak performance. Gold also under-performed in the previous two years when the greenback was weakening, although it did finally break out of a downtrend and consolidate sideways in a trading range.
A far more important factor has been the increasing attraction of risk-on markets like the US stock market as the economic recovery from the 2008 to 2009 global economic crisis has picked up pace; latterly the enthusiasm for US President Donald Trump’s tax cuts and repatriation of profits and even cryptocurrencies as a rival speculative asset.
However, every dog has its day and there is a growing school of analysts who think US equities are overdue for a correction after a very long bull market, if not a full-on crash, as soon as this autumn, with October the traditional month for such events.
The signs of a faltering global economic recovery have been flagged up recently by the International Monetary Fund. World stock market indices are already sharply down for 2017, and even the US markets have been struggling to maintain all-time highs amid greatly increased volatility this year.
Chinese stocks have undergone a 20 per cent correction, with the world’s third largest economy after the US and EU faltering under the weight of its own bad debts, years of over-expansion and now the start of Mr Trump’s trade war last Friday.
So I suppose the big question for gold bugs, after surviving another difficult week, is whether a US stock market correction might provide a big boost for precious metals this autumn? To my mind there has never been a better time to sell US shares and buy bullion, nor a more obvious winning strategy.
The global financial crisis was at first a curse and then a blessing for gold. Initially bullion prices were pulled down as the Titanic hit the iceberg. But then over the following 18 months precious metals rallied the most of any major asset class.
Would it be the same story again? History does repeat itself. But nobody really expects a repeat of the crisis. Even long-standing bears like Marc Faber don’t consider a major economic crash at all likely.
Therefore, gold forecasters presently point to more recent episodes of US stock market weakness as a guide to what might happen.
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