They’re dropping like flies!
Now US Secretary of State Rex Tillerson is out. Trump gave him the boot overnight, presumably because he wasn’t impulsive and aggressive enough…about everything. The Financial Times reports:
‘Mr Trump immediately named Mike Pompeo, the CIA director, as Mr Tillerson’s replacement, swapping a soft-spoken former ExxonMobil chief executive with a former Republican congressman with a far more hawkish foreign policy record.
‘“We got along actually quite well, but we disagreed on things,” Mr Trump said in an impromptu news conference on the White House lawn. “We were not really thinking the same; with Mike Pompeo, we have a very similar thought process . . . I think Rex will be much happier now.”
‘The president has repeatedly clashed with Mr Tillerson over most major foreign policy issues, with Mr Tillerson urging a more diplomatic approach to Iran and North Korea than his bellicose boss.’
The news appeared to be a good reason to take some money off the table. The Dow Jones index fell around 0.7%, the S&P 500 was down 0.84%, while the NASDAQ lost 1%.
Aussie stocks should see a decent fall today, after losing neatly 0.4% yesterday.
While you could read into Tillerson’s sacking as an ominous sign about the health of the Trump administration, I don’t think this is a new development. There have been ominous signs for a while now.
There is a concern that upcoming talks with North Korea will now have no calming influence. Instead, there will just be two lunatics talking at each other. It’s a worrying thought.
Which is why it’s worth keeping your eye on gold right now. Yesterday I mentioned gold could benefit from an eventual rise in inflation. That’s a longer term rationale.
Shorter term, though, a flare-up in North Korea could easily push the precious metal higher. Although, having said that, I don’t necessarily like it when gold — or oil for that matter — spikes higher on geopolitical ‘concerns’. That’s because these concerns are usually dismissed within a few days, and the price drops again.
Keep an eye on gold
Regardless, gold is worth following right now for a few reasons. While you could argue that gold will do well if inflation picks up, or if Trump and Kim Jung Un go the biff, in reality it doesn’t really matter.
The fact is that gold remains relatively undervalued. And good things usually happen to cheap assets.
Let me explain…
While gold isn’t a commodity as such — it is a monetary metal — it tends to move in tandem with commodities. Gold’s last big bull market in the 2000s coincided with a commodities bull market too. Both asset classes topped out in 2011, and went into a four to five year bear market.
But since the start of 2017, gold stocks, as represented by the NYSE Arca Gold BUGS Index [AMEX:HUI], have underperformed commodity stocks, as represented by the Thomson Reuters CRB Commodity Index. You can see that in the chart below:
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Source: Optuma |
In that time, gold stocks are down 9% while commodity stocks are up 12%. That’s partly due to massive rally gold stocks enjoyed from their bear market lows at the start of 2016. The sector has been consolidating sideways ever since.
Gold’s closest commodity mate is oil. If we compare the two commodities since the start of 2016 (the end of the bear market) you can see that oil (as measured by Brent crude) has massively outperformed. It’s up more than 70% versus gold bullion’s more pedestrian 20% gain.
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Source: Optuma |
While there is a lot of uncertainty around markets right now (I should say perceived uncertainty; markets are always uncertain) a good strategy is to go for relative value.
Right now, gold reflects good relative value. That is, relative to other asset classes, gold looks the least risky in terms of valuation. As a final example of this, take gold relative to the S&P 500. That chart below shows that an ounce of gold can only buy less than one half ‘share’ of the S&P 500. At the height of the gold bull market in 2011, an ounce of gold could buy the S&P 500 more than 1.6 times…
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Source: Optuma |
Relative to stocks, gold is still in a bear market. That’s seven years of underperformance.
Of course, this situation may continue for years to come. Just because it has underperformed doesn’t mean it must turn around.
But as I outline in a special report I’m just finalising (keep your eye out for it next week) there are reasons to believe that gold is readying for a major breakout. If that happens, the price will move higher, very quickly.
The pressure is building. But to take advantage of this potential move, you must position yourself in anticipation. If you wait, it will be too late. So look out for my report, which includes a high impact way to play gold’s impending move.
Greg Canavan,
Editor, Crisis & Opportunity