Soaring Yields Terrify Stock Market Investors

October 9, 2018

The incredibly positive price action of many gold stocks relative to bullion continues to occur on days when bullion falls hard against the dollar, and when the stock market gets hit. That’s impressive!

This is the key daily chart of GDX versus gold.

There’s a fabulous inverse head & shoulders bottom in play.

I coined the phrase, “safehavenization of gold stocks”. This is a developing theme in the West, where money velocity reverses, inflation rises, and corporate earnings growth fades.

In this environment institutional money managers begin to move their focus away from growth stocks and towards value, defensive stocks, and finally to gold stocks.

Corporate earnings are still incredibly strong, as I predicted they would be in 2018 in this stage of the business cycle.

They are strong, and inflationary! The other main inflationary forces in the West are tariffs and a Fed policy that is pushing money into the commercial banking system.

Like Jay Powell, I’ve cautioned investors that inflation from tariffs takes time to appear. Just because it’s not here yet doesn’t mean it isn’t coming, and more tariffs could set off major alarm bells amongst institutional money managers, analysts, and economists.

When I first began predicting a taper to zero, rate hikes, and quantitative tightening (QT), most gold market analysts thought QE to infinity was here to stay. They were dead wrong.

Now, I’m warning those same analysts that Jay Powell is a rate hiking steamroller. He doesn’t “blink” just because a US stock market price chaser feels sad when the US market falls. In the face of peaking earnings and skyrocketing yields, the stock market is almost certainly in danger of suffering a major decline.

Jay Powell is not going to stop hiking in the face of 20% corporate earnings growth this quarter. He’s not going to stop with rates and unemployment both still at historically low levels. He’s also not going to alter the QT program that Janet Yellen laid out for him years ago.

I’ve warned investors that a 50basis point hike from the Fed is quite possible. The bottom line: There won’t be any blinking, except from investors who are blinking to wipe away tears as their stock market price chase is incinerated by rate hikes, inflation, a spiking trade deficit, and fading corporate earnings.

The stock market game has changed for institutional money managers over the past week. With 20% corporate earnings growth, buying the US stock market for a traditional year-end rally with 20% was a “no-brainer” market play.

Now, money managers are suddenly staring at the astonishing speed that interest rates on the US 10year government bond are rising and this is a major alarm bell ringing very loudly for them.

My “bottom line” advice for all institutional money managers and retail investors: If you bet against the Fed you will lose.

I predicted the ECB would follow the Fed, kill QE, and launch rate hikes and QT.

It now appears that could happen even faster than I predicted it would! I’ve also predicted that euro hiking and QT would be followed in 2020 or 2021 by Japanese hiking and perhaps QT.

We expect gold to trade in a range between $1,200-1,350 for the year end. US dollar trades are getting crowded and US equities are trading at historical highs with stretched valuations…” – Robin Tsui, Street Street ETF gold strategist, October 8, 2018.

With Chinese and Indian stock markets and currencies hit by US tariffs, the massive population there is beginning to position themselves in gold bullion and related ETFs in preparation for a topping process in US stock, bond, and equity markets.

Tariffs have created a surge in the US trade deficit by driving investment money out of China.

As the money exits, it’s converted from yuan to dollars, putting upwards pressure on the dollar. In 1985 the US Treasury helped organise the Plaza Accord. That resulted in massive devaluation of the dollar.

More tariffs are a near-certainty. Those tariffs are ultimately inflationary and put immediate upwards pressure on the dollar. As they are unveiled, they will cause another spike in the US trade deficit. This situation is of great concern to the US Treasury.

It is happening as the head of the Fed calls the US government debt “unsustainable” in the long term. I’ve been emphatic that the US government can win the trade war with China and make its debt sustainable by devaluing the dollar. Quite simply, I’ve predicted this will happen, because it must happen.

This is the daily gold chart. Gold continues to majestically carve out the right side of a double bottom pattern. That pattern has a $1270 target price. That should be achieved easily as a tidal wave of positive forces are converging on the gold market right now. Chindian demand, tariffs, peaking US corporate earnings, QT, inflation, and many other gold-positive factors are all in play, all at the same time!

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