A month ago, here at Glint Perspective, we wrote about a potential time for rotation from stocks into gold.
Since then stocks have fallen over 6% and gold is up 3.5%. The chart below shows this clear inverse relationship and how it has played out over the last month since our article.
Arguably, both can attribute their moves to the trade war threats. There are serious concerns over the US-Chinese trade tensions along with Washington’s threat of tariffs on Mexico that will have implications for the global economy. This move that we have seen in gold over the past month may well be based on a simple concept of ‘flight to safety’. Tensions were not helped over this past week when the two giant political states clashed when they met in Singapore. The global market has become jittery as Mexican Foreign Minister Marcelo Ebrard suggested that the threat of punitive tariffs on Mexico would be devastating. Any comments concerning US growth slowing down further forces investors into a risk-off mentality.
When you look at the markets and the more you read, it seems as though people are not willing to listen to any worries on the fragility of the global economy or there are far too many blind-optimists who seem to think that because something bad has not happened yet, it never will. A 1914 mentality in our books.
Of all the charts and tables that haunts us, the Hussman MAPE stands out. We are higher in US stock valuations on nearly every metric than ever in history and a 60% decline should be seen as a typical mean reversion probably in next 18 months. It staggers us that people think that other ‘cheaper ‘ stock markets are immune when historic correlations to US equity declines are nearly 100% on most observations with a beta at best 1:1 as the table shows.
So, if all stock markets in the world collapse, at least to the same decline of the US market, how badly will investors fare everywhere. All we see, is complacent long assets and fund strategies that have worked in the last ten years, more often than not because of the short volatility aspect. We don’t meet many people at all who have large portfolio allocations in short selling funds, for the obvious reason, they have not worked that well.
As the central bankers have continually flooded the system with liquidity at every turn, the biggest problem that has happened is the debt-to-GDP ratios soaring. We all know Japan’s ratio is 250%, US, and most countries are over 100%, and if China actually counted correctly, it might be 300%! No one knows what the actual tipping point could be, but it is coming and nearly every strategy pursued by investors and wealth managers will have the largest drawdown in history.
Gold and other precious metals are severely unloved, and we can see this through the low COT levels. The COT (Commitment of Traders) data helps investors to understand the market dynamic within a particular market. This data provides a breakdown of the open interest for futures and options markets. This information is based on the position data supplied by actual traders (producers/ merchants /processors/users). Usually using this information, we look to understand the relationship between hedgers and speculators to help ascertain whether the underlying asset is over or undervalued. For both gold and silver the net position as % of open interest levels are significantly low, demonstrating how unloved these assets really are at the current time.
Time and time again, seasonality has shown itself to be a powerful force within the gold market. As we move into the summer period, gold’s positive seasonality shows up noticeably. Coupled with a low COT and wavering stock market, moving some of your hard-earned wealth into gold may be a very wise move.
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