Gold: Is The Reaction Over?

November 03, 2020
  1. It appears that both gold and stock market investors believe the winner of the US election (held today) will be more money printing and debt.
  2. That’s almost certainly true, but what happens if the fed becomes less keen to continue its accommodation?
  3. Please click here now. Double-click to enlarge this US stock market daily chart.
  4. A rectangle pattern is in play.  That’s theoretically bullish, but the rectangle is formed with lower lows and lower highs. 
  5. That’s a concern, and it may reflect institutional money manager worry about a lack of Fed action in 2021.
  6. The Fed’s actions over the past decade have been good for government bonds and the stock market, but they have come at a horrifying expense for Main Street.
  7. In contrast, the government’s Corona crisis handouts in 2020 have helped both Wall Street and Main Street.
  8. That’s because handouts to regular people have enabled them to buy products.  That produces corporate earnings and revenues which benefit the stock market.
  9. If the Fed were to curtail its handouts (QE and rate cuts) while the government continues theirs, the stock market could stagnate while gold would continue to rally.
  10. Please click here now. Double-click to enlarge.  This chart provides a view of the US stock market when stagflation began around 1966.
  11. While history doesn’t repeat exactly, the winds of stagflation in America are blowing, much like they were in 1966-1970. 
  12. The stock market can do well, but only if government and Fed handouts continue.  The bottom line:
  13. From both a risk and potential reward perspective, gold looks like the best asset to own going into 2021.
  14. Please click here now. The US government’s financial situation is obviously pathetic.
  15. If the Fed doesn’t provide more QE, the government may be forced to essentially take over the Fed and order it to print money as the government sees fit.
  16. Please click here now. Double-click to enlarge this superb GDX chart.  There are a lot of technical “green shoots” in play for the miners right now. 
  17. For example, after an enormous rally that began in March, a classic three-wave reaction has occurred from the August peak.
  18. Also, the SIL silver mining stocks ETF did not make a lower low last week, while GDX, GDXJ, and GOAU did.
  19. In addition, the GDX advance decline line is sporting a bullish non-confirmation with GDX. 
  20. Please click here now. Double-click to enlarge this weekly gold chart.  Note the 5,15 moving average sell signals; a price lull often follows the sell signal, rather then a steep decline in the price.
  21. In a strong market, the price also often stops reacting well above the key support zone, and that could be the case now. 
  22. There’s not enough price weakness for me to recommend “back up the truck” buying of size here, but there is enough positive technical and fundamental action to do some modest buying and to predict that the current reaction has a decent probability of having just ended!
  23. It’s important for investors to understand that if the Fed becomes reluctant to engage in greater accommodative policy, the US government is likely to “pick up the slack”, but it would do so with more handouts to Main Street rather then to Wall Street.  That’s an important scenario for inflation enthusiasts to keep in mind.
  24. The genesis of long-term stagflation appears to be in play, and while the gold community is fully prepared… with an allocation to gold, silver, and the miners, it looks like the rest of the nation will be joining the party too, but at prices that are much higher than they are now!

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