US Stocks to Top When Rate Cycle Starts?
10 August 2015
Gold starts the week at AUD $1474, silver sitting just under $20 an ounce. The AUD saw a bounce last week back up to 74c, which is more than likely just a short term recovery for our dollar. The US non farm payroll number was weaker than expected, but high enough for analyst to predict some probability of a US rate hike in September.
Gold and silver in USD haven’t seen much love over the past 30 days as the bottoming process continues. US gold starts the week at $1,092 awns silver at $14.77. There have been a lot of crystal ball gazers claiming to know the exact bottom for US gold to the dollar, $936 or $1,030 or $749. The truth is no one knows for sure, and there is no one technical analysis tool that you can rely on to provide such accuracy.
Bearing that in mind, gold will probably bottom where no one expects, and there’s a chance it already has. Rather than put a dollar value on it, it is more logical to claim that gold will bottom when sentiment and belief in the US federal Reserve, and in turn the US stock market, peaks. The US Fed have to start a rate hiking cycle soon if they want to maintain faith in their ‘macro-prudential’ ‘qualitative analysis’ ability.
If in fact their forecasting ability, turns out to be smoke and mirrors, (as were the case pre-GFC) the next rate hike cycle could be as damaging as the last one that took place in the years 2004 - 2007.
So if we look for a peak in US stocks as a better indicator for a potential bottom in sentiment towards Gold and Silver, we may be approaching the turn of the tide soon.
If we look at the facts, the US bull market for stocks is now near the seven year mark, we haven’t had a 10% correction since 2011, we are approaching the first rate hike since 2006, and valuations are high by historical means.
Despite being one of the most un-loved assets of the day, gold still remains a flight to safety and performs exceptionally well during periods of stock bear markets.
A look at the chart for the S&P 500, we are flat for the year 2015, and the 50 day moving average looks to roll over and cross the 200 day for the first time since 2011. A bit too early to call yet, but it seems the momentum we saw in the 2011 to 2014 years has definitely slowed this year as most anticipate a rate hike coming and the free liquidity of the Feds QE program has now ended.
The case for not owning gold is usually made by stock perma-bulls, and much of the negative sentiment towards gold over the last few years has been based on the opportunity costs of not being involved in the stock bull market. So if stocks top and start to rollover, it could lead to some panic and flood to safety.
We await to see the effect of the next US rate hike cycle, but it would be logical to see sentiment towards gold bottom around the same time that confidence in US stocks and the Federal Reserve peaks.
John Feeney.
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