Why Gold Might Be about to Surge

A few weeks ago I wrote that there was emerging value in the retail sector. I based that on the fact that everyone was getting too carried away with the ‘Amazon effect’.

One of the investing rules you should abide by is this: If it’s in the news, it’s in the price. That is, if everyone thinks that Amazon will come along and make life difficult for retailers, then a difficult life is already priced into those retailers’ stocks.

In the prior article I pointed out that JB Hi Fi [ASX:JBH] was trading on a price-to-earnings (P/E) multiple of around 10 times — a significant discount to the market. In other words, a lot of worry about the future was already factored in.

This week, Amazon finally launched in Australia. Rainbows and butterflies were not spotted, and Aussie retail stocks soared.

It’s just another confirmation of one of the trading rules you should abide by: Buy the rumour and sell the fact. Or, in the case of Aussie retail, sell the rumour and buy the fact.

JBH and Harvey Norman [ASX:HVN] both jumped around 6.5% yesterday. No doubt the short sellers, scrambled to buy back stock, drove some of that price increase.

Also helping the retailers cause yesterday was a cautious Reserve Bank keeping interest rates on hold. That decision came at the same time as retail sales data showed growth of 0.5% in October, well above expectations of 0.2%.

However, those expectations were no doubt influenced by previous months, when retail spending barely grew. So there is a bit of catch up going on with the October numbers.

Whether this is a bear market rally for retail stocks or something more sustainable, time will tell. But with interest rates remaining low and the employment market reasonably healthy, things aren’t that bad for retailers.

Moving from one unloved asset class to another, let’s take a look at gold.

It’s been pretty quiet lately. The Wall Street Journal points out that gold’s US$34.50 trading range in during November was the skinniest for the yellow metal since October 2005.

Following that period of calm 12 years ago, gold surged to new highs the following month.

What’s in store for gold this time around? 

Gold took a hit overnight as commodities weakened across the board and the US dollar strengthened. It fell to around US$1,262, which is just above recent support.

The chart below shows the support level as the green line on the right. Although it doesn’t capture the overnight price action, provided gold stays above support, it continues to look good for an eventual move higher.

Gold Futures - GCSpot (NYMEX) Daily 06-12-2017

Source: Optuma
[Click to enlarge]

In fact, given the headwinds facing gold, it’s held up surprisingly well. The bitcoin phenomenon, bullish equity markets, a strong economy and rising interest rates are all traditionally negative for gold.

Gold has had a pretty good year, considering. It’s trending higher and I think there is a good chance of it taking another leg up sooner rather than later.

I say that in part because the equity market looks so stretched. US stocks have had a relentless move higher this year. Take a look at the chart of the S&P 500.

It provides a weekly view of the largest global index going back to the start of the bull market in early 2009. Apart from some worrying moments in 2011 and 2015/16, the market has been relentlessly strong.

S&P 500 INDEX - SPX (WI) Daily 06-12-2017

Source: Optuma
[Click to enlarge]

But just in the past month or so, stocks have surged higher in a worrying manner. The ‘relative strength index’ (RSI) just hit a value of 82.9 points, the highest level since January 1994.

The RSI is a momentum oscillator that measures the speed and change of price movements. A reading above 70 indicates stocks are ‘overbought’.

So the current reading suggests stocks are extremely overbought. It doesn’t mean the market is topping out and going into a prolonged bear market. But it does suggest it needs a breather to regain some balance.

Whether that breather takes the form of a 10% correction (or more) or whether it just means the index consolidates and moves sideways for the next few months, I have no idea.

No one has any idea. You can’t predict the future.

But you can assign probabilities. Given where we are in the bull market (one of the longest on record) and the relentless surge higher since the August 2017 low, in my view there is a high probability of a correction unfolding soon.

If that unfolds, then you could see gold surge higher.


Greg Canavan,
Editor, Crisis & Opportunity

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Fat Tail Investment Research.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Crisis & Opportunity. As the name suggests, Greg sees opportunity in a crisis. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines traditional valuation techniques with charting analysis.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Money Morning here.

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