There’s no denying it…
Gold’s overpromised and under-delivered for years. The yellow metal has been trapped in a six-year bear market.
Most punters have got burnt during this time.
For example, the gold promoters argued the bull market was back in early 2016. It wasn’t the first time they had turned bullish during a rally.
Watching gold move higher, the mainstream got on-board. So did some of the most famous investors in the world. They told you to buy — the bull market was back. Yet, despite the positivity, the yellow metal crashed at the end of 2016. Most precious metal stocks nose-dived.
Are we back to square one?
Gold’s shown lots of promise this year.
It’s not that surprising…
On 5 January, I warned Resource Speculator readers that gold could rally multiple times this year. The ‘fake ’rallies are designed the trap the herd — again — before gold finally cracks below the US$1,000 per ounce level. That won’t fare well for a lot of egos and wallets.
We’re witnessing our first ‘fake’ rally right now. Before it’s finished, gold could scream towards the US$1,260 per ounce level. So, while you shouldn’t buy the yellow metal for investment purposes, it could offer a great short-term trading opportunity.
Trade the trade; not your emotions
Let’s start with Donald Trump.
Gold rallied into Trump’s inauguration on 20 January. Take a look at the chart below:
Click to enlarge
As ‘The Donald’s’ inauguration date loomed, uncertainty rose over his policies. Punters started to worry about the future and bought gold — the hedge against the confidence in government.
That said, did gold rally thanks to Trump…or was it history repeating?
Bloomberg provided a bullish answer on 21 January:
‘Gold bulls wagering the bullion rally has more room to run may have history on their side with the arrival of a new U.S. president.
‘A look at recent presidential transitions supports optimism among traders over the metal’s prospects. Gold has averaged gains of almost 15 percent in years marking the inauguration of a new president since the 1970s, advancing in five of those seven years. In contrast, the S&P 500 index of equities declined in four of those years for an average loss over the period of 0.9 percent.
‘From Presidents Gerald Ford to Barack Obama, bullion has often served as a haven in times of political flux. The metal has climbed almost 5 percent this year as questions over the possible economic impact of Donald Trump’s policies add to investor angst over Brexit and mounting trade frictions. Bulls reason that gold will extend its gain as scant details of Trump’s fiscal stimulus program and tensions with trading partners including China unnerve investors.’
To some, it was a long time coming. Lots of people believed that a Trump victory would have broken markets on the day of the US election. But that didn’t happen. Traders realised his economic plans — namely slashing corporate tax rates to 15% — would be bullish for stocks and bearish for gold.
That ‘Trump Trade’ seems to be flipping.
How to trade Gold in the coming months
The reality — and uncertainty — of a new president and his policies is hitting home. And, while some policies look great on paper, the smart punters are taking the cautious approach. The ‘wait and see’ trade is the play of the day.
Punters are bailing out of stocks. It’s not a surprise. In Markets and Money on 10 January, I warned that stocks have peaked for now, and that they would fall into the inauguration date.
That happened on target.
Capital moved out of stocks and into gold. For the record, that trade doesn’t seem like ending anytime soon.
Looking at the story today, stocks could be preparing for a major 10–15% correction. If capital keeps flowing into gold, it could rally towards the US$1,260 per ounce resistance level — at the very least — before the move is finished.
Now, the stock market correction probably won’t start until early February. The market needs time to figure out what it wants to do. It won’t correct straight away. If it’s preparing to make a big move to the downside, stocks could be volatile into early February. In fact, they could do the exact opposite of what I’m telling you now.
The market always make ‘fake’ moves — both up and down — before revealing its true hand.
The key takeaway: Gold’s likely to do the mirror opposite of stocks.
If stocks rally in the fortnight ahead, look to go short. If gold pulls back, there could be a great short-term buying opportunity. This could be a great trade. Remember, lots of gold companies have already rallied tremendously off their lows. So, if you can pick the best of the lot, you can make the most gains. For some juicy ‘penny gold’ stock ideas, check out Jim Rickards’ Gold Stock Trader here.
Analyst, Resource Speculator
From the Port Phillip Publishing Library