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US Stocks Go Parabolic

07 February 2020

Precious Metals Commentary

Metals continued to ease back this week, as it seems that markets are taking the official coronavirus numbers from the Chinese Government as fact, despite large parts of Beijing, Shanghai and the Hubei province being on lockdown. Gold traded slightly lower to $1,565 and silver to $17.80. The RBA held rates steady at their February meeting this week, which pushed the AUD higher to 0.673 US cents, and metals lower for local investors to AUD $2,326 for gold and $26.70 for silver at time of writing.
 
XAUAUD Chart
 
Markets remain resilient and somewhat immune to any fears of coronavirus, finding any excuse to rip higher. The SPX moved higher on unconfirmed rumours of a cure this week. We certainly hope this will be the case soon as the news and video footage coming out of China is massively concerning, with the official numbers being released by the Chinese Government not matching the reality of the measures that are being taken in major cities. The Chinese Communist Party reportedly dispatched a platoon of 300 ‘propagandists’ to Wuhan the ‘strengthen public opinion’, which is raising concerns of a potential cover up on the actual number infected and deceased in China. Not sure how a team of propagandists is going to help, but this ties in with CNN’s report that Tencent may have accidently or covertly leaked the actual numbers from within China as screens briefly showed the death toll over 24,000 numerous times before being corrected.

This week we saw global macro hedge fund Hunter Burton Capital “calling for a 15-25% correction in the S&P 500 in 2020, and an Aussie dollar closer to 60 cents than 70” in their January Newsletter. Portfolio manager Tony Bradley has over 30 years experience in foreign exchange markets and noted “there aren’t too many cards to fall from the deck before a recession of some description grips Australia. I am gravely bearish on the stock markets and the Aussie dollar for 2020”. He wouldn’t be the only one concerned about the bubbly nature of the stock market currently and we will cover a few reasons why below.

S&P 500 Chart

(Source: http://www.hunterburtoncapital.com/pdfs/HBCMonthlyReviewJan2020.pdf)
 

Parabolic FOMO in US stocks

Last Friday as we wrapped up that week’s update, we were discussing what to cover this week and John noted that the charts of some US companies were pretty crazy and highlighted how bubbly the market is. Well, give the guy a prize because come Monday, Tesla started a run up that can only be described as “crazy”.

The funniest chart we came across plotted Tesla against two bubbles nearly 300 years apart.

Tesla vs South Sea Company (1720) vs Bitcoin (2017) Chart
 
It is not normal to have a company with a market capitalisation over $100 billion trading +/- 20% from one trading day to the next on little-to-no news. A combination of retail investor FOMO, lots of leverage, and a stock that is one of the most shorted in history and you wind up with some wild price action. The term ‘short squeeze’ might have a 2020 Tesla chart next to it in a future investment guide.

Tesla has attracted some high-profile bears so a lot of Tesla “fan boys” have speculated with glee that shorts have capitulated, and their buying back has been a force behind the price. Macro Tourist, however, says the amount of short sellers was falling well before this run up and says move is more about institutional money that is looking to fulfil ESG (environment social governance) mandates.

Of course, younger retail investors have also been behind this move, with CNBC noting that “Monday, 12,000 Robinhood accounts bought it for the first time”.

It is not just Tesla - we see the same behaviour across the broader US market. Compound Advisors observed that for the first time ever, there were four $1 trillion dollar companies in the US with Apple and Microsoft having parabolic moves to start the year too.

Largest US Companies by Market Cap Chart

This sort of price behaviour is just an example of a phase markets can go through when conventional company valuation methods and disciplines are thrown out the window and FOMO drives parabolic moves in “story” stocks.

A good example of the valuation disconnect comes from technical analyst newsletter the McClellan Market Report, who said that if the primary driver of stock prices is supposed to be earnings, then it is “irregular” that earnings as a percentage of GDP have been diverting from stock prices for over five years.

Pre-Tax Corp Profits as % of GDP Chart

Their explanation is that the Fed’s QE programs did not, as they were supposed to, boost the real economy and “instead was that all of the money-printing boosted stock prices”. Mass psychology appears to trump valuations for now and there are a few signs out there that we are in the ‘mania phase’ of a stock market bubble but we wouldn’t want to guess when it ends. The S&P500 could go through a blow off top some 20%+ higher than here, but regardless of what we do this year, these periods of mania in any asset class typically always end the same way.

This market reminds us of another tech bubble - the Dot Com period - but that would be ancient history, we suspect, to those Robinhood investors. In fact, the current market setup is actually much worse than that turn of the century episode according to fund manager Crescat Capital, and it is worryingly not just in technology, but across the board. The percentage of sectors in the S&P500 at record valuations is the highest in 30 years, with valuations based on an Enterprise Value / Sales basis being much higher than the market tops of 2000 and 2007.

% of Sectors at Record Valuations Chart

As a result, Crescat say that “the bear case for US stocks has never been stronger” – they feel that “commodities are perhaps the only asset class where investors can find deep value today” and are setting up for a generational buying opportunity.

Precious metals are their primary focus as they believe they are likely to be the first mover in the commodities asset class when the market realises how undervalued they are.

This crazy market action reminds us of the saying that “those who cannot remember the past are condemned to repeat it” but then that was said by some dead white guy so what why would just out of short pants investors trading the market for the first time listen to him?
 

2020 Price Predictions

Each year, the London Bullion Market Association (LBMA) collects the forecasts of precious metal analysts for the upcoming year from various bullion banks and consultancy firms.

Analysts provide estimates of their high, low and average prices for 2020 and the person whose average is closest to the actual average for the year wins a 1oz gold bar.

A golden incentive plus industry bragging rights results in a high degree of “crowd sourced” accuracy, as the chart below shows. Apart from 2013, the actual average rarely falls significantly out of the range of analyst estimates.

London Bullion Market Association Gold Forecast Chart

This year, the industry is quite bullish, with even the most bearish average above the 2019 result. The average gold forecast is $1,558.82 with a range of $1,398 to $1,755. Note that these figures refer to the yearly average, so the price is expected to spend time above and below those forecasts.

In terms of gold’s trading range for 2020, the consensus appears to be $1,440 to $1,690, but Ross Norman (with seven wins under his belt) has stuck his neck out, seeing gold reaching a high of $2,080 this year.

We sought out Nick Frappell (ABC Bullion's Global General Manager, who has decades of experience in bullion banks and trading firms) for his forecast, and he thinks gold will average $1,573.80 this year, trading within a range of $1,465 to $1,756 (and we got those before the LBMA numbers came out, so no cheating there).

The analysts are equally bullish on silver’s prospects for 2020, even if the chart below doesn’t show it (it is skewed by silver’s impressive bull run into 2011). They see an average silver price of $18.21, which is 12.4% up on 2019’s average of $16.20.

London Bullion Market Association Silver Forecast Chart

Eyeballing the individual forecasts, there is much less consensus on silver’s trading range compared to gold, but on average silver looks to trade between $16.51 and $20.49 in 2020, with three analysts seeing silver trading above $22.50 at some point.

Nick is a lot more bearish than the pack on silver, seeing an average of $17.71 with a trading range of $16.50 to $19.90.

With analysts like Macro Business saying that “65 cents is a comfortable base case for 2020” for the Australian dollar, if the LBMA forecasts pan out then we are looking at an average Australian gold price of $2,400 and silver trading around $28.

See below for Nick’s detailed commentary on the outlook for gold and silver in 2020.
 

Nick’s Forecast for 2020

Gold remains bullish technically (see following caveat) and environmentally, primarily via the interest rate environment, both forward-looking in terms of market expectations, and in terms of the secular decline in natural (‘Wicksellian’) interest rates.

Recent US data includes a weaker Philly Fed and Richmond Fed manufacturing index and poor Durable goods orders. This suggests that much of the stimulus provided by corporate tax breaks is fading.

Additionally, the outbreak of Coronavirus is a clear threat to economic activity both within China and outside, and one bank (SocGen, on 29 January) is calling for a 10% correction in global equities.

Forecasting US interest rates via interest rate futures prices shows that markets expect the implied rate to drop to 1.14% from the current target rate of 1.75% by the end of January 2021.

Similar forecasting methods for The Bank of Japan imply stasis, while the ECB implies maintaining policy and the Bank of England implies are drop in the target rate from 0.75% to 0.37%.

Meanwhile, the Fed has increased its balance sheet from September 2019, which will be interpreted as a return to QE in some form, and certainly a push away from policy normalisation.

Loose monetary policy has translated into staggering debt numbers, with global debt to GDP exceeding 322%, with the Institute for International Finance expecting debt to reach US$257 trillion by the end of March, in a deflationary environment.

Emerging market debt denominated in FX has climbed spectacularly since 2015, particularly in Africa and the Middle East, where it has doubled in % of GDP terms.

In short, there are a number of risk factors, couple with a generally benign interest rate environment for gold.

So where do I see ‘average’ gold prices in 2020?

I’ll call the ‘centre’ average US$1,573.80 with a high of $1,756 and low of $1,465. For silver, I am going with $17.71 and a trading range between a low of $16.50 and a high of $19.90.

Until next time,
 
John Feeney and Bron Suchecki
ABC Bullion
 
If you have any questions or feedback about this week’s report, we would love to hear from you. You can contact John Feeney (@JohnFeeney10) and Bron Suchecki (@bronsuchecki) directly on Twitter, otherwise please feel free to send us an email at comms@abcbullion.com.au, or call us during trading hours on 1300 361 261.

Disclaimer
This publication is for educational purposes only and should not be considered either general or personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, and past performance is not necessarily indicative of future performance. Any prices, quotes, or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.