March 28, 2019
Prior to the FOMC meeting last week, I forecast that the Fed would be dovish on both interest rates and the balance sheet reduction program, but this would mean that all of the dovish “speak” since their verbal 180 in January that contributed to the rally in stocks is now priced in. I believe that is now the case and there is little more the Fed can say that will push stocks higher.
Other factors in the stock market rally, such as China’s gargantuan stimulus in January that equated to 5% of its annual GDP in 1 month, has been dramatically reduced. Stock buybacks, which reached a record level in Q1, are now fast approaching their buyback blackout period ahead of corporate earnings for Q1.
On top of that, global liquidity, the primary driver of stock prices since 2009, is now falling again.
Any trade deal between the U.S. and China has now been pushed off until May “at the earliest”, even though I don’t think any substantive deal will be agreed upon. Taken together, this could mean that stocks are in for a very rough ride in the next month or so.
Since early 2018, my primary scenario for a historic low in Gold has been a Fed reversal in policy to rate cuts and QE due to a stock market crash. We got the first leg of that crash in Q4 followed by the relief rally in Q1, the second leg, and now we may be about to drop in the third and final leg to lower lows in the S&P around 2100 to 2200.
Such a crash would provide the Fed the excuse to not only cut interest rates and revert to QE thereafter, but also unleash monetary insanity-on-steroids to boost risk assets and kick the can a little further down the road one last time. The Fed has already stated that it is considering various tools in addition to rates and QE that it rejected previously. Negative interest rates, a cap on bond yields, and buying corporate debt and equities are among them. This is on top of buying massive amounts of maturing and new treasury bonds, as budget deficits and the national debt soar at a time when foreign banks have basically stopped buying. Just imagine how much they will need to print to do all of this and what it will mean for the dollar. Under those circumstances, Gold can only go higher, in my opinion. A lot higher.
In almost every major crisis, bonds lead equities. Yields fall first, then stocks follow. In November, 10-year treasury yields peaked at 3.24% and are now almost a full percentage point lower at 2.39%. If credit is leading again this time around, then we should expect stocks to fall sharply soon, perhaps as early as next week. In such a scenario, expect bond yields to fall further.
As I wrote last week, Gold still maintains a near perfect inverse relationship with real interest rates, which have tumbled in recent weeks. This has been due to the significant drop in bond yields. If this continues as stocks fall, then Gold is going higher.
TIPS are the inverse of real yields)
The only caveat to that scenario is if the Bullion Banks do what they did between March and October 2008 and try to squeeze out all of the weak longs before the massive rally in Gold to follow. But even then, it just delayed the inevitable rally in Gold which began in October and led to a near 3x rise to 1900.
I have said “No QE, no bottom” in stocks. I believe the Fed’s return to QE is inevitable, and when that happens, Gold will soar. It is only a matter of time now, and that time is in months, not years.
Until then, the range in Gold remains 1280-1350. A break of 1350 almost guarantees a test of 1377, whereas a break of 1280 opens up a move down to the 200-day moving average at 1251 and the 200-week moving average at 1241 below there.
As I said last week: If the Banks do try to force everyone out before the rally ahead, it will likely create the last bargain buying opportunity in metals, perhaps ever. “BTFD”.