The
recent stock-market selloff is persisting, fueling mounting worries
among investors. The intensifying volatility and lack of a quick
rebound higher is strangling euphoric sentiment, spawning
self-reinforcing selling pressure. Scoffed at a few months ago, the
notions that a young bear market is underway and a recession looms
are gaining traction. The great beneficiary of this ominous
stock-market downturn will be gold.
Gold
has always been an essential asset class for prudently diversifying
investment portfolios. Uniquely it tends to rally when stock
markets weaken, offsetting some of the losses in typical stock-heavy
portfolios. Gold acts like portfolio insurance, usually soaring
when stock markets plunge on unforeseen news. All throughout
history, wise investors have recommended everyone have 5% to
10% of their portfolios in gold.
But
like insurance in general, the important role gold plays in
portfolios is gradually forgotten when it isn’t needed. Just a few
months ago, the US stock markets seemed invincible. The flagship
S&P 500 broad-market stock index (SPX) had powered 333.2% higher
over 9.5 years by late September. That made for the 2nd-largest and
1st-longest stock bull in US history! Investors were convinced that
would last indefinitely.
The
SPX had surged 9.6% year-to-date by that latest peak, while gold had
slumped 7.3%. Thus investors felt no need to allocate virtually any
capital to gold, they were and are
radically
underinvested in it. This is especially true of American stock
investors, who were wildly optimistic after long years of big
stock-market gains. Their effective portfolio exposure to gold was
vanishingly small back in late September.
The
500 elite stocks of the SPX had an extreme collective market
capitalization way up at $26,141.4b as that topping month waned. It
is interesting contrasting that with the physical gold bullion
holdings of the world’s dominant gold exchange-traded fund, the
American GLD SPDR Gold Shares. GLD has long been the go-to
destination for American stock investors looking to allocate capital
for gold exposure in their portfolios.
At
the end of September as stock euphoria peaked, GLD’s total holdings
were merely worth $28.4b. That implies American stock investors
were running trivial gold allocations around 0.11%! That’s
on the order of only 1/50th the minimum 5% that’s been universally
advised for centuries if not millennia. So it’s not much of a
stretch to argue American stock investors had zero gold exposure,
they were effectively all-out.
The
sharp stock-market selloff in the few months since those halcyon
all-time record highs has surprised most, but it shouldn’t have. As
Q4’18 dawned, something ominous happened that was unprecedented in
stock-market history. The US Federal Reserve upped its
quantitative-tightening campaign necessary to start unwinding its
$3625b of quantitative-easing money creation over 6.7 years to
its terminal velocity.
October 2018 would be the first month ever to see the Fed’s monetary
destruction ramp to a staggering $50b-per-month pace. And
even to unwind just half of the Fed’s radical QE, QT would have to
keep on destroying $50b per month of QE-conjured money for 30
months! At the end of September when the SPX was just 0.6% off its
all-time record high, I explained all this in depth warning it was
this bull’s death
knell.
And
indeed within a week of Fed QT going full-throttle, the SPX started
to slide. There was no way QE-levitated stock markets could ignore
QT obliterating that QE money. Every daily selloff since had its
own unique story and specific drivers, which I discussed and
analyzed in our subscription newsletters. These all added up to
enough selling to spawn an ongoing stock-market correction, an SPX
selloff exceeding 10%.
Blame it on Fed QT, stock-market
bubble valuations,
mounting US-China trade-war threats, Republicans losing the House,
or whatever you want, but by Black Friday the SPX had fallen 10.2%
over 2.1 months since that euphoric record peak. The stock markets
staged some sharp rallies within that span, but they quickly fizzled
proving to be dead-cat bounces. This recent action is
ominously looking very bear-market like.
We
can’t know for sure whether the long-overdue new bear market driven
by epic record Fed tightening is indeed upon us until the SPX falls
20%+ on a closing basis. This recent correction would still have
to double to hit that bear-market threshold. But gold has
certainly been the main beneficiary of the recent stock-market
weakness. Investors are starting to remember the ages-old wisdom of
diversifying into gold.
This
week’s chart looks at the US-dollar gold price superimposed over the
SPX during the past 4 years or so. Despite gold being forgotten in
recent years as the stock markets surged ever higher, it remains in
a young bull market. And that was spawned by the last set of
back-to-back corrections in the SPX, which catapulted gold sharply
higher. We’re likely on the verge of another stock-selloff-driven
major gold upleg!
GLD’s physical-gold-bullion holdings held in trust for its
shareholders reveal how American stock investors feel about gold.
This past spring they started slumping as gold was sold to move even
more capital into the lofty US stock markets. For 5 months in a row
ending in September, GLD’s holdings retreated as investors dumped
GLD shares faster than gold was falling. By early October GLD’s
holdings hit a 2.6-year low.
I
penned a whole essay on this stock-euphoria-driven
gold exodus
in late September, explaining why it was happening and why it was
likely to soon reverse. And that shift in gold-investment sentiment
began the very day the SPX started plunging in mid-October!
Up until October 9th the stock markets looked totally normal, the
SPX had only drifted a trivial 1.7% lower from its peak. Everyone
remained wildly bullish.
But
something snapped on October 10th, that fateful day the SPX plunged
3.3% out of the blue on no catalyst at all. Heavy
technically-motivated selling accelerated led by the market-darling
mega tech stocks. For years investors had believed them
bulletproof, their businesses so good they could weather any stock
selloff or economic slowdown. Fears surged on the worst SPX down
day since back in early February.
That
very day American stock investors started returning to gold. They
poured capital into GLD shares so aggressively they forced a major
1.2% holdings build. GLD’s mission is to track the gold price, but
it has its own supply-and-demand profile independent from gold’s.
So when GLD shares are being purchased faster than gold is bought,
GLD’s share price threatens to decouple to the upside on that excess
demand.
So
GLD’s managers must vent that differential buying pressure directly
into the physical gold market in order to equalize it and maintain
tracking. They do this by issuing enough new GLD shares to satisfy
all the excess demand, and then plow the cash proceeds into gold
bullion. Thus rising GLD holdings show American stock-market
capital is flowing into gold. That proved to be GLD’s
biggest build in 6.7 months.
That
fateful day proved a major inflection point for both
near-record US stock markets and the extremely-unpopular gold. As
the SPX continued to weaken over the next couple months, GLD
continued to enjoy modest builds on investment gold buying. By late
November GLD’s holdings had climbed a considerable 4.5% over 6
weeks. That has helped push gold 5.5% higher since its mid-August
lows, a solid young upleg.
Odds
are that gold buying via GLD by American stock investors is only
beginning. The longer this stock-market weakness persists, the
deeper their worries will grow. And the more their stock-heavy
portfolios bleed, the quicker they will remember they should’ve
allocated 5% to 10% to gold. Once gold investment demand is kindled
by falling stock markets, it tends to balloon dramatically and take
on a life of its own.
Gold’s young bull market today that was forgotten this summer began
as 2016 dawned. Much like this year, in the first half of 2015 the
US stock markets were powering to dazzling new record highs. Since
it seemed like stocks could do nothing but rally indefinitely, gold
was forgotten and shunned. It slumped to a brutal 6.1-year secular
low by mid-December 2015, with investors really wanting nothing to
do with it.
But
their ironclad euphoria started to crack soon after the stock
markets corrected. In mid-2015 the SPX finally suffered its first
correction in an incredibly-extreme 3.6 years
after being
levitated by relentless Fed money creation from its third
quantitative-easing campaign. Gold caught a bid on that 12.4% SPX
selloff over 3.2 months, but then faded again into the expected
first Fed rate
hike in 9.5 years in mid-December.
Then
the SPX fell into another 13.3% correction over 3.3 months into
early 2016. Seeing menacing back-to-back corrections after
long years without one really deflated gold-suppressing stock-market
euphoria. So in early 2016 American stock investors began prudently
rediversifying their stock-dominated portfolios into gold. That
birthed today’s gold bull, and the gold-buying momentum fed on
itself to drive a powerful upleg.
Gold
went from being left for dead in mid-December 2015 to surging 29.9%
higher in just 6.7 months solely on American stock investors
returning! This is no generalization, the hard numbers prove it
without a doubt. The world’s best gold fundamental
supply-and-demand data comes from the venerable World Gold Council.
It releases fantastic quarterly reports detailing the global buying
and selling happening in gold.
Gold
blasted higher on SPX weakness in Q1’16 and Q2’16. According to the
latest data from the WGC, total world gold demand climbed
188.1 and 123.5 metric tons year-over-year in those key quarters.
That was up 17.1% and 13.2% YoY respectively! But the real stunner
is exactly where those major demand boosts came from. It wasn’t
from jewelry buying, central-bank buying, or even physical
bar-and-coin investment.
In
Q1’16 and Q2’16, GLD’s holdings alone soared 176.9t and 130.8t
higher on American stock investors redeploying into gold after
back-to-back SPX corrections. Incredibly this one leading gold ETF
accounted for a staggering 94% of overall global gold demand growth
in Q1’16 and 106% in Q2’16! So there’s no doubt without American
stock investors fleeing into gold via GLD this gold bull never
would’ve been born.
Gold
was holding those sharp gains throughout 2016 until Trump’s surprise
presidential victory unleashed a monster stock-market run on hopes
for big tax cuts soon. Gold was pummeled in Q4’16 as American stock
investors pulled capital back out to chase the newly-soaring SPX.
That quarter total global gold demand per the WGC fell 103.4t YoY or
9.0%. GLD’s 125.8t Q4’16 holdings draw accounted for 122% of that!
Gold’s fortunes are being driven by American stock investors’
collective buying and selling of GLD shares. And nothing motivates
them to redeploy capital into gold to diversify their stock-heavy
portfolios like major SPX selloffs. Recent months’ one has already
proven serious enough to rekindle differential GLD-share buying.
And as H1’16 proved, once investors start driving gold higher its
rallies tend to become self-feeding.
The
more physical gold bullion American stock investors buy via GLD
shares, the more gold climbs. The higher gold rallies, the more
investors want to buy it to ride the momentum and chase its gains.
So buying begets buying, driving gold higher fairly rapidly.
And when stock markets are sliding, gold is often the only asset
class rallying. That makes it even more attractive to investors
getting pounded by sliding stocks.
This
latest SPX correction is even more damaging to sentiment because it
is 2018’s second one. Back in early February the SPX plunged
10.2% in 0.4 months, which started to crack sentiment. Back when
this gold bull was born it was the second of back-to-back SPX
corrections that proved the coup de grâce in hurting stock-market
sentiment enough to unleash a reallocation into gold. This scenario
is playing out again.
Provocatively seeing the three major US stock indexes suffer two
10%+ corrections within any single calendar year is itself a
super-bearish omen. 2018 joined 1973, 1974, 1987, 2000, 2001, 2002,
and 2008 as the SPX’s only other dual-correction years. Those
coincided with a 48.2% SPX bear, a 20.5% single-day SPX crash,
another 49.1% SPX bear, and a third 56.8% SPX bear! All three bears
triggered recessions.
This
stock-market weakness isn’t only likely to persist, but the odds
really favor it snowballing into another major SPX bear market.
Gold investment demand will naturally surge as stocks burn, fueling
a strong bull market. Gold’s 29.9% gain over 6.7 months at best so
far in this bull is nothing. Gold’s last secular bull from April
2001 to August 2011 saw it soar 638.2% higher! Gold’s gains as the
SPX rolls over should be massive.
With
a trivial 0.1% portfolio allocation to gold, what happens to gold
prices if American stock investors just return to a still-immaterial
1.0%? That’s still way under the 5% to 10% recommended in normal
times, and plenty of great investors believe 20% gold allocations
are necessary during stock bears. Gold’s upside from here with
virtually-zero US-stock-market capital allocated to it is vast. And
it could accelerate rather fast.
The
timing of this current SPX correction is likely to magnify
bearish psychology. It has occurred entirely within Q4’18. The
SPX exited Q3’18 just 0.6% off its record peak from a week earlier.
So I suspect a lot of American retirement investors have no idea
just how much carnage their precious capital has suffered. When
they get their quarterly statements from their money managers in
January, they could really freak out.
Even
worse, far too much of this retirement capital was allocated to the
market-darling
mega techs which were the biggest holdings across most funds.
Their losses have far outpaced the SPX’s. As of that latest
correction low on Black Friday when the SPX was down 10.2%, Apple,
Amazon, Microsoft, Alphabet, Facebook, and Netflix had collapsed
25.8%, 26.4%, 10.8%, 19.9%, 39.4%, and 38.2% from their all-time
highs!
The
mega techs that nearly single-handedly pushed the SPX higher for
years averaged 26.8% losses, or 2.6x the SPX’s! When
investors who don’t closely follow the stock markets figure that out
next month, the investment demand for rallying gold ought to
explode. The first half of 2019 has a setup much like H1’16, where
gold essentially powered 30% higher. A similar upleg from
mid-August’s lows isn’t a stretch at all.
Another 30% run from $1174 would leave gold at $1525. And once gold
climbs decisively back over its bull-to-date high of $1365 from
early-July 2016, investment interest and demand will soar.
Just like the mega tech stocks, the higher gold prices the more
investors want to buy it. A mere 16% gold upleg off August’s lows,
or another 10% higher from this week’s levels, would near that
psychologically-huge
bull breakout!
All
investors should always have 5% to 10% of their investable
capital allocated to gold. But almost none do today as a
long-overdue bear market fueled by epic record Fed QT looms. If you
don’t have that core gold allocation, you need to get it in place
before stocks fall much farther and gold surges much higher. The
gold miners’
stocks will greatly leverage gold’s gains too, their leading
index soared 182.2% largely in H1’16!
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The
bottom line is this stock selloff is boosting gold. Flagging gold
investment demand turned on a dime when the stock markets started
plunging in mid-October. Gold has rallied on balance since as
American stock investors start redeploying capital. Their buying
alone via GLD shares was fully responsible for gold’s sharp 30%
upleg in 2016’s first half. That followed the last back-to-back
corrections in US stock markets.
And
between record Fed tightening running full-throttle, continuing
dangerous bubble valuations, and the mounting trade wars, this
recent stock selling is likely to persist on balance. So gold
investment will look far more attractive. Coming from
virtually-zero gold portfolio allocations, investors have massive
buying to do. The higher they push gold, the more other investors
will chase it. Especially as US stock markets weaken. |